ENSTAR INC, 424B4, 1998-06-08

ENSTAR INC
424B4, 1998-06-08
COMPUTERS & PERIPHERAL EQUIPMENT & SOFTWARE

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<PAGE>

$25,000,000
ENSTAR INC.

6.75% TWO YEAR
8.50% FIVE YEAR
9.75% TEN YEAR

SUBORDINATED DEBENTURES
MINIMUM INVESTMENT OF $1,000

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

ENStar Inc. ("ENStar" or the "Company") is offering hereby subordinated
debentures in the aggregate principal amount of $25 million ("the Debentures").
The Debentures are unsecured obligations subordinated to all Senior Indebtedness
(as defined in the Indenture pursuant to which the Debentures will be issued) of
the Company, which may vary from time to time. The Debentures are pari passu
with all other unsecured indebtedness of the Company, unless such indebtedness
is specifically subordinated to the Debentures. The Indenture does not limit the
amount of Senior Indebtedness or other indebtedness of the Company. As of April
17, 1998, the Company had no outstanding Senior Indebtedness. As of April 17,
1998, the Company had approximately $17.7 million of outstanding subordinated
debentures. The Company is a holding company. Accordingly, to pay the principal
and interest on the Debentures, the Company will be dependent on dividends or
other transfers from its subsidiaries or it will be required to issue additional
indebtedness or additional equity securities or to sell certain of its assets.

The interest rates at which the Debentures will be offered are expected to
change by order of the Company from time to time based on the Company's
financial needs and current market conditions, but any such change will not
affect the interest rate of any Debentures purchased prior to the effective date
of such change. Any changes in the interest rates at which the Debentures will
be offered will be made by post-effective amendment to this Prospectus setting
forth such changes to the interest rates. Interest on each Debenture will be
payable, at the election of the initial purchaser, quarterly, at maturity, or,
if the Debenture is in a denomination of $5,000 or more, monthly.

The Company may, at its option, redeem any or all of the Debentures prior
to maturity on at least 30 days (but not more than 60 days) notice to each
holder of Debentures to be redeemed, without a premium, at a price of 100% of
the principal amount of the Debentures, plus accrued interest on a daily basis
to the redemption date. The Company may not reissue redeemed Debentures.

The Debentures are offered by officers and employees of the Company
directly without an underwriter and on a continuous basis with an expected
termination date in April 1999; however, the Company reserves the right to
terminate this offering at any time prior to such date. No minimum amount of
Debentures must be sold in order for the Company to accept and deposit the
proceeds of this offering. There is no assurance that all or any portion of the
offered Debentures will be sold. It is unlikely that any trading market for the
Debentures will develop, or, if developed, will be sustained, or that the
Debentures may be resold at any price. The Company reserves the right to reject
any subscription, in whole or in part.

The Debentures offered hereby are not deposits or accounts with a bank,
savings and loan association or other financial institution regulated by federal
or state banking authorities and such securities are not entitled to any of the
regulatory protections applicable to deposits or accounts with such regulated
financial institutions, including deposit insurance or governmental guarantees.

SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.

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

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
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UNDERWRITING
PRICE TO DISCOUNT AND PROCEEDS TO
PUBLIC COMMISSION COMPANY (1)
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<S> <C> <C> <C>
Per Debenture ..................... 100% None 100%
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Total ............................. $25,000,000 None $25,000,000(1)
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</TABLE>
(1) Before deducting expenses payable by the Company estimated at $95,000.

THE DATE OF THIS PROSPECTUS IS MAY 13, 1998

<PAGE>

ADDITIONAL INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement, as amended (the "Registration
Statement"), on Form S-1 under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to the Debentures offered hereby. As permitted
by the rules and regulations of the Commission, this Prospectus omits certain
information contained in the Registration Statement. For further information
with respect to the Company and the Debentures offered hereby, reference is
hereby made to the Registration Statement and to the exhibits and schedules
filed therewith. Statements contained in this Prospectus as to the contents of
any agreement or other document filed as an exhibit to the Registration
Statement are not necessarily complete, and in each instance reference is made
to the copy of such agreement filed as an exhibit to the Registration Statement,
each such statement being qualified in all respects by such reference. The
Company is subject to the informational requirements of the Securities Exchange
Act of 1934, as amended, and in accordance therewith files reports and other
information with the Securities and Exchange Commission. A copy of the
Registration Statement, including exhibits and schedules thereto, and reports,
proxy statements and other information filed by the Company with the Commission,
may be inspected by anyone without charge at the Commission's principal office
in Washington, D.C. and copies of such material may be obtained from the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549, and at the Commission's regional offices located at Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and at 7
World Trade Center, New York, New York 10048, upon payment of certain fees
prescribed by the Commission. The Commission also maintains a World Wide Web
site which provides online access to reports, proxy and information statements
and other information regarding registrants that file electronically with the
Commission at the address http://www.sec.gov.

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

The Company distributes to its shareholders annual reports containing financial
statements audited by its independent accountants and makes available copies of
quarterly reports for the first three quarters of each fiscal year containing
unaudited financial statements.

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PROSPECTUS SUMMARY

THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY AND SHOULD BE READ IN
CONJUNCTION WITH THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS AND THE
NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS.

THE COMPANY

ENStar Inc., a Minnesota corporation formed in 1995 ("ENStar" or the
"Company"), is a holding company. Its principal subsidiaries are Americable,
Inc. ("Americable"), Enstar Networking Corporation ("Enstar Networking") and
Transition Networks, Inc. ("Transition"). Americable is a distributor of
premise wiring, connectivity products and low-end networking electronics.
Enstar Networking is a network integrator that provides services to design,
build, maintain, and protect corporate network infrastructures. Transition is a
manufacturer of connectivity devices used in local area network ("LAN")
applications. ENStar also owns 1,025,000 shares of common stock of CorVel
Corporation ("CorVel"), or an approximate 25% interest in CorVel, a provider of
cost containment and managed care services designed to address the medical costs
of workers' compensation.

ENStar was formerly a wholly owned subsidiary of North Star Universal, Inc.
("NSU"). In connection with transactions (the "Reorganization Transactions")
consummated pursuant to a reorganization agreement entered into between NSU and
Michael Foods, Inc. ("Michael"), NSU transferred, on or prior to February 28,
1997, to ENStar certain of its assets, including its shares of common stock of
Americable and Transition and its shares of CorVel, and certain other assets.
Pursuant to the Reorganization Transactions, (i) NSU merged with Michael and
(ii) the outstanding common stock of ENStar was distributed to the shareholders
of NSU (the "Distribution"). As a result of the Distribution, ENStar ceased to
be a subsidiary of NSU and became a publicly owned company whose stock is quoted
on the Nasdaq National Market under the symbol "ENSR." In connection with the
Reorganization Transactions, ENStar agreed to indemnify Michael against certain
losses arising from the Reorganization Transactions and to assume certain
liabilities of Michael. See "--Reorganization Transactions."

Americable is a distributor of premise wiring, connectivity products, and
low-end networking electronics. As a value-added distributor, Americable
supplies a wide array of voice and data communication related products such as
cable (both copper and fiber optic), cable assemblies, components (blocks,
jacks, connectors, patch cords, patch panels) and networking hardware.
Americable sells to a wide range of customers throughout the United States in
the voice and data communications aftermarket, including contractors, resellers,
systems intergrators, and installers.

Americable also manufactures a wide variety of cable assemblies,
subassemblies and specialty products for its customers. Some of these products
are manufactured to standard specifications for sale by Americable through its
distribution business, others are custom designed and manufactured by Americable
to customer specifications.

Enstar Networking, previously operated as the network integration business
segment of Americable, was organized in April 1997 to distinctly focus the
networking service activities from the traditional distribution and
manufacturing operations of Americable. Enstar Networking provides services to
design, build, maintain and protect corporate network infrastructures. Enstar
Networking's mission is "to provide our clients with technical services and
solutions that improve the performance and integrity of their networks." Enstar
Networking offers customized, integrated solutions through three strategic
business units: Security Integration Group; Network Integration Services; and
Structured Wiring Services.

CorVel is an independent nationwide provider of medical cost containment
and managed care services designed to address escalating medical costs.
CorVel's services include perferred provider organizations, automated medical
fee auditing, medical case management, independent medical examinations,
utilization review and vocational rehabilitation services. Such services are
provided to insurance companies, third party administrators and employers to
assist them in managing the medical costs and monitoring the quality of care
associated with medical claims.

The mailing address of ENStar's principal executive office is 6479 City
West Parkway, Eden Prairie, Minnesota, 55344; its telephone number is
(612) 941-3200.

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THE OFFERING

Securities Offered . . . . . . The Company is offering up to $25,000,000
principal amount Subordinated Debentures (the
"Debentures"). The Two, Five and Ten Year
Debentures have maturities of two, five and
ten years, respectively, and mature on the
first day of the month immediately following
the second, fifth and tenth anniversary of
the date of issuance, respectively. See
"DESCRIPTION OF DEBENTURES -- General."

Interest Rate and Payment . . . Interest on the Debentures will accrue from
the date of issuance. Interest will be
payable quarterly or at maturity at the option
of the Debenture holder. If the interest is
paid at maturity only, it will be compounded
quarterly. Additionally, holders of
Debentures in denominations of $5,000 or
more may elect to receive interest payments
monthly. Once issued, the interest rate
applicable to a Debenture will not adjust
prior to maturity. See "DESCRIPTION OF
DEBENTURES -- Interest."

Redemption . . . . . . . . . . The Debentures are redeemable at the
Company's option, in whole or in part, at any
time prior to maturity on at least 30 days
(but not more than 60 days) notice to each
holder of Debentures to be redeemed, without
a premium, at a price of 100% of the
principal amount of the Debentures, plus
accrued interest on a daily basis to the
redemption date. See "DESCRIPTION OF
DEBENTURES -- Redemption at the Option of the
Company."

Repayment upon Death. . . . . . Under certain circumstances, the Company will
repay up to $25,000 in aggregate principal
amount of Debentures at par upon the death of
a Debenture holder. See "DESCRIPTION OF
DEBENTURES -- Redemption by the Holder Upon
Death."

Subordination . . . . . . . . . The Debentures are unsecured obligations of
the Company and subordinated to all present
and future Senior Indebtedness of the
Company, as defined in the Indenture. The
Debentures are pari passu with all other
unsecured indebtedness of the Company, unless
such indebtedness is specially subordinated
to the Debentures. There are no restrictions
in the Indenture on incurring additional
Senior Indebtedness or other indebtedness. As
of April 17, 1998, the Company had no
outstanding Senior Indebtedness. As of April
17, 1998, the Company had approximately $17.7
million of outstanding subordinated
debentures. See "DESCRIPTION OF DEBENTURES --
Subordination."

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<PAGE>

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION

The following table sets forth certain selected historical consolidated
financial information of ENStar that has been derived from and should be read in
conjunction with ENStar's Consolidated Financial Statements, including the Notes
thereto, which are included elsewhere in this Prospectus:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS
DATA(1)
Revenues. . . . . . . . . . . . . . . . . . . . . . . . . $ 54,352 $ 64,123 $ 54,891 $ 47,193 $ 46,756
Operating income (loss) . . . . . . . . . . . . . . . . . (4,979) (53) 1,033 (702) (1,978)
Interest expense, net . . . . . . . . . . . . . . . . . . (809) (204) (247) (348) (361)
Income (loss) before income taxes and equity
in earnings of unconsolidated subsidiary. . . . . . . . (5,788) (257) 786 (1,050) (2,339)
Net income (loss) . . . . . . . . . . . . . . . . . . . . $ (2,261) $ 1,072 $ 1,572 $ 286 $ (1,524)
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------

Basic and diluted net income (loss) per share (1) . . . . $ (0.69) $ 0.32 $ 0.49 $ 0.09 $ (0.48)
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Weighted average common and common
equivalent shares outstanding (1) . . . . . . . . . . . 3,289 3,309 3,217 3,235 3,146

CONSOLIDATED BALANCE SHEET DATA (END OF PERIOD)
Total assets. . . . . . . . . . . . . . . . . . . . . . . $ 43,315 $ 36,015 $ 35,251 $ 32,243 $ 30,222
Long-term debt, including current maturities. . . . . . . 16,333 1,178 1,246 3,607 3,443
Shareholders' equity. . . . . . . . . . . . . . . . . . . 12,405 20,947 19,694 18,176 17,035
</TABLE>
- --------------------
(1) Basic and diluted net income (loss) per share for 1993 to 1996 was computed
using the weighted average number of outstanding shares of NSU Common Stock
during each period presented adjusted for the Distribution of one share of
ENStar Common Stock for every three shares of NSU Common Stock outstanding.

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-5-
<PAGE>

RISK FACTORS

IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING RISK
FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING AN INVESTMENT IN THE
DEBENTURES.

ABSENCE OF INSURANCE AND GUARANTEES

The Debentures are not insured or guaranteed by any governmental agency or
any public or private entity as are certificates of deposit or other accounts
offered by banks, savings and loan associations or credit unions. In these
respects, the Debentures are similar to the subordinated unsecured debt
securities of other commercial entities, but are unlike certificates of deposits
or other similar accounts offered by banks and savings institutions.

LIMITED COVENANTS; ABSENCE OF SINKING FUND

The Debentures do not have the benefit of extensive covenants. The
covenants in the Indenture are not designed to protect holders of the Debentures
in the event of a material adverse change in the Company's financial condition
or results of operations. These covenants do not place any restriction on the
Company's ability, among other things, to create or incur Senior Indebtedness or
other indebtedness or to pay dividends. The Indenture does not contain
provisions that permit the holders of Debentures to require that the Company
repurchase or redeem the Debentures in the event of a takeover, redemption,
recapitalization or similar restructuring, and the Indenture does not contain
covenants specifically designed to protect holders of the Debentures in the
event of a highly leveraged transaction involving the Company. In addition, the
Debentures will not have the benefit of sinking fund payments by the Company.

NO MARKET FOR THE DEBENTURES

The Debentures will not be listed on a national securities exchange or
authorized for quotation on the Nasdaq National Market. It is unlikely that any
trading market for the Debentures will develop, or if developed, will be
sustained, or that the Debentures may be resold at any price. In addition, the
Debentures may be issued in uneven amounts which could further restrict the
ability to trade the Debentures.

LIMITED HISTORY OF PROFITABILITY; UNCERTAINTY OF FUTURE RESULTS

ENStar has a limited history of profitability. During 1997, ENStar
experienced an operating loss of approximately $5 million as a result of a
reduction in demand from certain large customers, costs associated with the
introduction of Enstar Networking as a separate business, and the addition of
new engineering and sales personnel within each of its operating companies.
Despite the impact of certain cost reduction efforts implemented in the fourth
quarter of 1997, ENStar expects to record an operating loss for the year ended
December 31, 1998. ENStar's ability to achieve profitability is primarily
dependent upon Enstar Networking generating higher volumes of service revenues
from network integration and network security consulting. No assurance can be
made, however, that Enstar Networking will be successful in increasing its
service revenues to an adequate level to achieve profitability.

Transition's ability to achieve sales growth is highly dependent upon its
ability to offer new products that meet customers' demands in a rapidly changing
market, particularly in light of the relatively short life cycle of its
products. In order to achieve market acceptance of new products, Transition
plans to continue its investment in research and development. Transition had
research and development expenses of approximately $1.0 million (7% of net
sales) in 1995, $1.5 million (9% of net sales) in 1996, and $1.4 million (8.1%
of net sales) in 1997. There can be no assurance, however, that its research
and development efforts will result in commercially successful new products in
the future. In addition, Transition believes that sales and marketing expenses
will continue to increase in terms of absolute dollars in an effort to
differentiate its products and enhance its competitive position.

These anticipated increases in operating expenses at Transition may result
in lower operating profit at ENStar, if Transition is unable to maintain its
current gross profit margins and/or achieve an appropriate level of sales
growth. Further, if Enstar Networking is not successful in generating higher
volumes of service revenues, its operating margins could decline and its ability
to achieve operating profitability will be adversely affected. Based on the
above factors, there can be no assurance that ENStar will be able to achieve
profitability on a quarterly or annual basis in the future.

-6-
<PAGE>

Sustained operating losses could lead to cash flow shortages, which in turn
could materially adversely affect ENStar's ability to make scheduled payments on
its indebtedness, including the Debentures. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- Results of
Operations."

CASH FLOW DEFICITS

ENStar has experienced cash flow deficits from operations in certain prior
years. ENStar's ratio of earnings to fixed charges for each of the five fiscal
years ended December 31, 1997, 1996, 1995, 1994 and 1993 was (3.76), (.50),
2.54, (0.72) and (2.68), respectively. During the years 1997, 1996, 1994 and
1993, the Company's earnings were inadequate to cover its fixed charges. The
coverage deficiency was approximately $5,788,000, $257,000, $1,050,000 and
$2,339,000 for the fiscal years ended December 31, 1997, 1996, 1994 and 1993,
respectively. Based on the Company's recent cash flow deficits, the Company does
not expect its fixed charges to decrease significantly or for its earnings from
its operating subsidiaries to improve significantly. The Company's ability to
repay the Debentures could be adversely affected if its cash flow deficits
continue and the Company were unable to raise additional funds through the
issuance of new debt or equity securities or the sale of assets of the Company.
See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION -- Capital Resources and Liquidity."

SUBORDINATION OF DEBENTURES; NO LIMITATION ON INDEBTEDNESS OF THE COMPANY

The Debentures are subordinate and junior to any and all Senior
Indebtedness of the Company, as defined in the Indenture and rank pari passu
with all other unsecured indebtedness of the Company not expressly subordinated
to the Debentures. There are no restrictions in the Indenture regarding the
amount of Senior Indebtedness or other indebtedness of the Company, which may
fluctuate. In the event of a default on the Senior Indebtedness or the
liquidation of the Company, all Senior Indebtedness must be paid prior to any
payment of principal or interest on the Debentures. As of April 17, 1998, the
Company had no outstanding Senior Indebtedness. As of April 17, 1998, the
Company had approximately $17.7 million of outstanding subordinated debentures.
See "DESCRIPTION OF THE DEBENTURES -- Subordination."

NO SECURITY FOR PAYMENT

The Debentures offered hereby are unsecured and do not have the benefit of
a sinking fund or other similar provision providing for retirement of the
Debentures at their maturity. The Company is a holding company. Accordingly, to
pay the principal and interest on the Debentures, the Company will be dependent
on dividends or other transfers from its subsidiaries or it will be required to
issue additional indebtedness or additional equity securities or to sell certain
of its assets. The ability of the Company's subsidiaries to pay dividends or
make other transfers to the Company may be restricted by their respective
operating performances, cash flows and covenants with such subsidiaries' lender.
Further, no assurance can be made that the Company will be able to issue
additional indebtedness, additional equity securities or sell any of its assets
on favorable terms or at all. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- Capital Resources and
Liquidity."

REDEMPTION

The Company, at its option, may at any time redeem all or a portion of the
outstanding Debentures at any time prior to maturity on at least 30 days (but
not more than 60 days) notice to each holder of Debentures to be redeemed. If
the Company redeems less than all of the outstanding Debentures, the Company
will redeem the Debentures by interest rate or maturity. The Debentures will be
redeemed without a premium at a price of 100% of the principal amount plus
accrued but unpaid interest. Upon redemption, former holders of Debentures
redeemed will no longer have rights under the Indenture. See "DESCRIPTION OF
DEBENTURES -- Redemption at the Option of the Company."

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<PAGE>

NO FIRM UNDERWRITING COMMITMENT

The Debentures are being offered by officers and employees of the Company
without a firm underwriting commitment. While the Company intends to seek to
sell $25 million principal amount of Debentures, the Company has not established
a minimum amount of proceeds that must be received from the sale of Debentures
in order to accept proceeds from Debentures actually sold. Accordingly, no
assurance can be given as to the principal amount of Debentures that will be
sold. See "USE OF PROCEEDS."

CERTAIN RISKS PERTAINING TO THE CORVEL COMMON STOCK

Because CorVel is not a wholly owned subsidiary, the Company does not have
the ability to utilize cash flows from CorVel in connection with its wholly
owned operating subsidiaries or to repay its indebtedness, including the
Debentures. The only cash the Company can obtain from CorVel is cash dividend
payments made to all CorVel shareholders. Since its initial public offering,
CorVel has not paid any dividends and it has indicated that it does not
anticipate doing so during the foreseeable future. See "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- Capital
Resources and Liquidity."

ENStar does not have any agreement with CorVel requiring CorVel to register
the shares of CorVel Common Stock currently held by ENStar for sale under
federal or state securities laws. In the absence of registration of its CorVel
Common Stock, the ability of ENStar or, after the Distribution, Americable to
sell the CorVel Common Stock will be limited to sales pursuant to Rule 144 of
the Securities Act of 1933, as amended (the "Securities Act"), and the volume
limitations thereof, and to private negotiated sales, which may adversely affect
the ability of ENStar to sell a large portion of the holdings of CorVel Common
Stock at a given time.

PRODUCT AND SERVICE DEVELOPMENT RISKS

With respect to Transition, the market for networking products is subject
to rapid technological change, declining prices, evolving industry standards and
frequent new product introductions and, therefore, requires a high level of
expenditures for research and development. Transition may be required to incur
significant expenditures to develop such product offerings. There can be no
assurance that Transition will be successful in identifying, sourcing,
developing and marketing product enhancements or new products that respond to
this rapidly changing market. Also, there can be no assurance that its product
enhancements and new products will adequately meet the requirements of the
marketplace and achieve market acceptance. A critical factor in market
acceptance of product enhancements and new products is the timely introduction
of such products and enhancements in order to take advantage of existing market
opportunities. Transition has, in the past, experienced delays in the
introduction of certain of its new products and enhancements. See "BUSINESS --
Business Strategy -- Transition" and "-- Products and Services -- Transition."

The markets for the products and services offered by Americable and Enstar
Networking are also characterized by rapidly changing technology and frequent
new product and service offerings by its competitors. The introduction of new
technologies can render existing products and services obsolete or unmarketable.
The companies' success will depend on its ability to enhance existing products
and services and to develop and introduce, on a timely and cost-effective basis,
new products and services that keep pace with technological developments and
address increasingly sophisticated customer requirements. See "BUSINESS --
Business Strategy -- Americable" and "-- Products and Services -- Americable."

ENStar's business, financial condition and results of operations could be
materially adversely affected if Transition were to incur delays in developing
or introducing new products or product enhancements or if such new products or
product enhancements did not gain market acceptance or in the event that
Americable or Enstar Networking were to incur delays in sourcing and developing
new products and services or that these products and services fail to achieve
market acceptance.

EXPANSION STRATEGY

ENStar's expansion strategy includes the addition of new locations in new
geographical markets at Enstar Networking. Enstar Networking currently operates
in seven locations and the success and the rate of its expansion into new
geographical markets will depend on a number of factors, including general
economic and business conditions affecting the industries of Enstar Networking's
customers in such markets, competition, the availability of sufficient capital,
and the ability to attract and retain qualified personnel and operate
effectively in geographic areas in which Enstar Networking has no prior
experience. As a result, there can be no assurance that Enstar Networking will
be able to achieve its planned expansion on a timely or profitable basis.

-8-
<PAGE>

Further, if Enstar Networking experiences significant internal growth, it
may be required to make further investments in personnel and information
systems. Failure to successfully hire or retain such personnel or implement such
systems could have a material adverse effect on ENStar's results of operations
and financial condition. There can be no assurance that Enstar Networking will
be able to manage its expanding operations effectively, that it will be able to
maintain or accelerate its recent growth or that Enstar Networking will be able
to continue to operate profitably. See "BUSINESS -- Business Strategy."

FLUCTUATIONS IN QUARTERLY RESULTS

ENStar's quarterly revenues and operating results have varied significantly
in the past and will likely continue to do so in the future. Quarterly revenues
and operating results may fluctuate as a result of the demand for the products
and services of its operating companies, the introduction of new hardware and
software technologies offering improved features, the introduction of new
products and services by competitors, changes in the level of operating
expenses, competitive conditions and economic conditions generally. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION."

At Enstar Networking, the purchase of its products and services generally
involves a significant commitment of capital, with the delays frequently
associated with large capital expenditures and required authorization procedures
within an organization. Such expenditures by customers can range from $50,000 to
over $500,000. The sales cycle for Enstar Networking's products and services
generally ranges from three to nine months depending on the size of the project,
extent of competition and degree of the customer's technical expertise. For
these and other reasons, Enstar Networking's operating results are subject to a
number of risks over which it has little or no control, including customers'
technology life cycle needs, budgetary constraints and internal authorization
reviews.

A variety of factors may cause period-to-period fluctuations in the
operating results of Americable and Transition. Such factors include, but are
not limited to, product mix, competitive pricing pressures, material costs and
timely availability, revenue and expenses related to new product introductions,
as well as delays in customer purchases in anticipation of new products or
enhancements. Further, Transition plans to continue to invest in research and
development, sales and marketing and technical support staff.

ENStar's operating results also could be adversely affected if its
operating subsidiaries are unable to adjust spending sufficiently in a timely
manner to compensate for any unexpected revenue shortfall.

DEPENDENCE ON, AND NEED TO RECRUIT AND RETAIN, KEY PERSONNEL

ENStar's success depends to a significant extent on its ability to attract
and retain key personnel. In particular, Enstar Networking and Transition are
dependent on their respective engineering and technical personnel. Competition
for such technical personnel is intense and no assurance can be given that
ENStar will be able to recruit and to retain such personnel. The failure to
recruit and to retain management and technical personnel could have a material
adverse effect on ENStar's anticipated growth, revenues and results of
operations.

CONCENTRATION OF REVENUES

Enstar Networking provides its products and services to customers in
various industries including health care, financial services, legal,
manufacturing, and education. In 1997 and 1996, Enstar Networking derived
approximately 43% and 52%, respectively, of its revenues from its 25 largest
customers. While Enstar Networking seeks to build long-term customer
relationships, revenues from any particular customer can fluctuate from
period-to-period due to such customer's purchasing patterns.

Americable sells products to a number of installers, resellers, other
distributors and system integrators. During 1997 and 1996, Americable derived
approximately 68% and 76%, respectively, of its sales from its largest 100
customers.

Transition distributes its products through a number of volume distributors
and resellers throughout the United States and in over 50 countries worldwide.
During 1997 and 1996, Transition derived approximately 46% and 59%,
respectively, of its sales from its largest 25 customers.

Any termination or significant disruption of the companies' relationships
with a number of its principal customers could have a material adverse effect on
ENStar's business, financial condition and results of operations. In addition, a
deterioration in the financial condition of any of its principal customers could
expose ENStar to the possibility of large accounts receivable write-offs, which
would adversely affect ENStar's financial condition and results of operations.

-9-
<PAGE>

DEPENDENCE ON KEY SUPPLIERS AND PRODUCT SUPPLY

The networking industry has experienced product supply shortages and
customer order backlogs due to the inability of certain manufacturers to supply
certain products on a timely basis. In addition, certain suppliers have
initiated new channels of distribution that increase competition for the
available product supply. There can be no assurance that suppliers will be able
to maintain an adequate supply of products to fulfill customer orders for each
of the operating companies on a timely basis. Each of the operating companies
have experienced product supply shortages in the past and expect to experience
such shortages from time to time in the future. Failure to obtain adequate
product supplies or fulfill customer orders on a timely basis or substantial
change in the cost of components could affect the companies' ability to deliver
products in a timely and cost-effective manner and could have a material adverse
effect on ENStar's business, financial condition, and results of operations.

Transition's products include certain components that are currently
available from single or limited sources, some of which require long order lead
times. Although Transition believes that it would be able to obtain alternative
sources of supply for the components included in its products if required, there
can be no assurance that Transition will be able to locate any such sources or
will be able to obtain alternative sources of supply on a timely and economic
basis, if at all. Any reduction in supply, interruption or extended delay in
timely supply or change in costs of components could materially adversely affect
Transition's business and results of operations and, consequently, the business,
financial condition and results of operations of ENStar.

A significant portion of Enstar Networking's revenues is derived from sales
of network hardware, including products of various major manufacturers such as
3Com Corporation, Bay Networks, Inc., and Cisco Systems, Inc. Americable
derives a significant portion of its sales from cable assemblies, bulk cable
and connectors, including components and materials of certain manufacturers
including Berk-Tek, Inc., AMP Incorporated, and General Cable Corporation. The
agreements with these suppliers from which the companies purchase products
directly generally contain provisions for periodic renewals and for termination
by the supplier without cause, generally upon relatively short notice. Although
Americable and Enstar Networking believe its supplier relationships are good,
there can be no assurance that their relationships will continue as presently in
effect. Although Americable and Enstar Networking believe that they would be
able to obtain alternative sources of supply for its products if required, there
can be no assurance that Americable and Enstar Networking will be able to locate
any such sources or will be able to obtain alternative sources of supply on a
timely and economic basis, if at all. The loss of a major manufacturer or
supplier, the deterioration of a relationship with a major supplier or the
failure of Americable or Enstar Networking to establish good relationships with
major new suppliers as they develop, could have a material adverse effect on
ENStar's business.

INVENTORY MANAGEMENT

The networking industry is characterized by rapid product improvement and
technological change resulting in relatively short product life cycles and rapid
product obsolescence, which can place inventory at considerable valuation risk.
The typical life cycle of Transition's products ranges from 18 months to three
years for its basic LAN and terminal products and from 12 to 18 months for its
advanced LAN products. Some of Transition's products include components that are
currently available from limited sources and require long order lead times.
Because of the long lead times and Transition's desire to be responsive to
customer demand, Transition has maintained higher inventory levels compared to
other networking manufacturers. Transition's inventories are valued at the lower
of cost or market and management periodically assesses the appropriateness of
the inventory valuations giving consideration to any slow-moving and nonsalable
inventory relative to current market selling prices of comparable products.
Provisions for inventory obsolescence are recorded in the period any valuation
impairments are identified. For 1997 and 1996, total inventory write-offs as a
percentage of net sales were approximately 1% and 2.3%, respectively. During the
fourth quarter of 1996, Transition recorded approximately $500,000 of provision
for inventory obsolescence related to the discontinuance of one of its advanced
LAN stackable hub product lines. Due to the ongoing risk of product obsolescence
and changes in customer demand, there can be no assurances that Transition will
be able to successfully manage its existing and future inventories.

Although it is industry practice for Americable's suppliers to provide
price protection to distributors such as Americable in order to reduce the risk
of inventory devaluation, such policies are subject to change. Americable also
has the option of returning, subject to certain limitations, a percentage of its
current product inventories each quarter to certain manufacturers as it assesses
each product's current and forecasted demand. The amount of inventory that can
be returned to suppliers varies under Americable's agreements and such return
policies may provide only limited protection against excess inventory. There can
be no assurance that suppliers will continue such policies, that unforeseen new
product developments will not affect Americable adversely or that Americable can
successfully manage its existing and future inventories. Any inventory
adjustments could adversely affect ENStar's financial condition and results of
operations.

-10-
<PAGE>

COMPETITION

Each of ENStar's businesses faces substantial competition from a large
number of companies, some of which are larger, have greater financial resources,
broader name recognition and, in many cases, lower product and operating costs
than ENStar.

The industry in which Transition operates is highly competitive, and
Transition believes that such competition will continue to intensify. The
industry is characterized by rapid technological change, declining prices, short
product life cycles, frequent product introductions and evolving industry
standards. Transition competes with a number of independent companies focused
on the LAN market, including companies with significantly greater financial
resources, more extensive business experience, and greater market and service
capabilities than Transition. Transition competes with a number of companies
focused on designing and manufacturing products for the LAN market, including,
among others, Allied Telesyn, AMP Incorporated, and Digi International. Enstar
Networking faces competition from large system integrators such as GE Capital
Information Technology Services, CompuCom Systems Inc., Vanstar Corporation and
a significant number of smaller regional VARs and network integrators.
Significant competitors within Americable's business include, among others,
Anixter International Inc., Anicom, Inc., Kent Electronics Corporation, and
Graybar, Inc. See "BUSINESS - Competition." There can be no assurance that
ENStar will be able to compete successfully.

ENStar expects to face further competition from new market entrants and
possible alliances between competitors in the future. Certain of ENStar's
current and potential competitors have greater financial, technical, marketing
and other resources than ENStar. As a result, they may be able to respond more
quickly to new or emerging technologies and changes in customer requirements or
to devote greater resources to the development, promotion and sale of their
products and services than ENStar. No assurance can be given that ENStar will be
able to compete successfully against current and future competitors. See
"BUSINESS Competition."

SHARES ELIGIBLE FOR FUTURE SALE; CONTROL BY MICHAEL FAMILY

Sales of a substantial number of shares of ENStar Common Stock in the
public market could adversely affect the market price for the ENStar Common
Stock. James A. Michael and Jeffrey J. Michael, each a member of the Board of
Directors of ENStar, and certain limited partnerships controlled by them (the
"Michael Family Shareholders"), beneficially own approximately 1,916,663 (or
58.5%) of the outstanding Common Stock of ENStar as of April 17, 1998.

Accordingly, the Michael Family Shareholders will have the ability to
exercise significant influence over the business and affairs of ENStar,
including the ability to approve or reject corporate actions requiring the
approval of shareholders. The shares of ENStar Common Stock held by the Michael
Family Shareholders are "restricted securities" as that term is defined in Rule
144 under the Securities Act. Such shares are eligible for immediate sale,
subject to compliance with the volume limitations and other restrictions of Rule
144.

INDEMNIFICATION OBLIGATIONS WITH RESPECT TO REORGANIZATION TRANSACTIONS

In connection with the Reorganization Transactions, ENStar agreed to
indemnify Michael against certain losses and to assume certain liabilities of
NSU, including any liabilities arising out of the Distribution and any taxes
resulting from the Distribution. See "BUSINESS -- Reorganization Transactions."
There can be no assurance that any obligation to indemnify Michael for any such
loss or other liability will not have a material adverse effect on the business,
financial condition and results of operations of ENStar.

-11-
<PAGE>

RATIO OF EARNINGS TO FIXED CHARGES

<TABLE>
<CAPTION>
Years ended December 31,
1997 1996 1995 1994 1993
----------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Ratio of earnings to fixed charges. . . . . . (3.76) (.50) 2.54 (0.72) (2.68)
Deficiency in earnings to fixed charges . . .$ 5,788 $ 257 $ -- $ 1,050 $ 2,339
</TABLE>

For purposes of calculating the ratios of earnings to fixed charges,
earanings are defined as income (loss) before income taxes plus fixed charges.
Fixed charges consist of interest expense and the estimated interest portion on
rental payments.

USE OF PROCEEDS

The primary purposes of this offering are to provide additional financing
for the Company's growth and to increase the Company's financial flexibility.
Net proceeds, including interest earned thereon, to the Company from the sale of
the Debentures will be used for general corporate purposes and investment in
ENStar's operating companies. Proceeds from the sale of Debentures may also be
used from time to time to repurchase ENStar Common Stock depending on market
conditions, and, at such time as outstanding Debentures come due, the Company
may use proceeds from the sale of new Debentures offered hereby to retire such
maturing Debentures. In addition, proceeds from the sale of the Debentures may
be used to fund future acquisitions at Americable, although the Company has no
present commitments, agreements or understandings with respect to any such
acquisitions.

There is no minimum number or amount of Debentures required to be sold in
order to deposit and use the proceeds from sale of Debentures, and there can be
no assurance that all or any portion of the Debentures will be sold.
Accordingly, the amount of Debentures sold may be substantially less than the
maximum offered hereby. In such event, the net proceeds from the sale of the
Debentures will be used for the purposes set forth above.

PLAN OF DISTRIBUTION

The Company is offering hereby up to $25 million aggregate principal amount
of the Debentures. The Debentures will be offered by authorized officers and
employees of the Company directly without an underwriter and on a continuous
basis with an expected termination date in April 1999; however, the Company
reserves the right to terminate this offering of Debentures at any time prior to
such date. In compliance with Rule 3a4-1 of the Exchange Act of 1934, the
officers and employees of the Company will limit their participation in the
offering of Debentures to preparation of written communication or delivery of
communication through the mail or other means that do not involve oral
solicitation by the officer or employee, responding to inquiries of a potential
purchaser in a communication initiated by the potential purchaser, or performing
ministerial and clerical work related to the offering. No underwriting discounts
or commissions of any kind will be paid to such officers or employees in
connection with this offering. No minimum amount of the Debentures must be sold
in order for the Company to accept and deposit the proceeds of this offering.

The Debentures only may be purchased by means of the offer to purchase
Debentures contained in the form of Subscription Agreement provided by the
Company (the "Subscription Agreement"). The Company will not accept an offer to
purchase Debentures or negotiate checks delivered for payment on the sale of
Debentures unless the prospective purchaser has previously received this
Prospectus. In the event that the Company receives a properly executed
Subscription Agreement and payment for the purchase of Debentures from any
person who has previously received this Prospectus, but who has not received a
current post-effective amendment thereto, the Company will not accept the
Subscription Agreement nor accept any payment therefor until the lapse of five
business days following the mailing of a confirmation of sale and current post-
effective amendment to such prospective purchaser. During this five business day
period, any prospective purchaser of Debentures may revoke his or her offer,
orally or in writing, and the Company will promptly return any checks or funds
previously delivered to it. Once the Company accepts an offer, however, orders
to purchase Debentures and the issuance of such certificates will be deemed to
have occurred as of the date of receipt by the Company of a Subscription
Agreement and payment. The Company reserves the right to reject any offer to
purchase in whole or in part.

Prospective purchasers who have submitted Subscription Agreements and payment of
the purchase price for Debentures may revoke their offer by writing the Company
at 6479 City West Parkway, Eden Prairie, Minnesota 55344, Attention: Investment
Department, or by calling (612) 941-3200. Investors seeking information as to
the current interest rates for the Debentures may contact the Company at (800)
247-1246 to receive a current quote as to such rates.

-12-
<PAGE>

SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

The following selected financial data of the Company are qualified by
reference to and should be read in conjunction with Management's Discussion and
Analysis of Results of Operations and Financial Condition and the Consolidated
Financial Statements and the Notes thereto included elsewhere herein. (See Notes
1 and 2 to Notes to Consolidated Financial Statements for a description of the
entities included in the consolidated financial statements and the basis on
which the consolidated financial statements were prepared.) The consolidated
statements of operations data for the years ended December 31, 1997, 1996 and
1995, and the consolidated balance sheet data December 31, 1997 and 1996 are
derived from, and are qualified by reference to, the audited consolidated
financial statements included elsewhere in this Prospectus and should be read in
conjunction with those consolidated financial statements and notes thereto. The
consolidated statements of operations data for the years ended December 31, 1994
and 1993 and the consolidated balance sheet data at December 31, 1995, 1994 and
1993 are derived from audited consolidated financial statements not included
herein.

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
CONSOLIDATED STATEMENTS OF OPERATIONS
DATA(1)
<S> <C> <C> <C> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 54,352 $ 64,123 $ 54,891 $ 47,193 $ 46,756
Operating income (loss). . . . . . . . . . . . . . . . . . . . (4,979) (53) 1,033 (702) (1,978)
Interest expense, net. . . . . . . . . . . . . . . . . . . . . (809) (204) (247) (348) (361)
Income (loss) before income taxes and equity
in earnings of unconsolidated subsidiary . . . . . . . . . . (5,788) (257) 786 (1,050) (2,339)
Net income (loss). . . . . . . . . . . . . . . . . . . . . . . $ (2,261) $ 1,072 $ 1,572 $ 286 $ (1,524)
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------

Basic and diluted net income (loss) per share (1). . . . . . . $ (0.69) $ 0.32 $ 0.49 $ 0.09 $ (0.48)
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Weighted average common and common
equivalent shares outstanding (1). . . . . . . . . . . . . . 3,289 3,309 3,217 3,235 3,146

Consolidated Balance Sheet Data (end of period)
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . $ 43,315 $ 36,015 $ 35,251 $ 32,243 $ 30,222
Long-term debt, including current maturities . . . . . . . . . 16,333 1,178 1,246 3,607 3,443
Shareholders' equity . . . . . . . . . . . . . . . . . . . . . 12,405 20,947 19,694 18,176 17,035

--------------------
</TABLE>

(1) Basic and diluted net income (loss) per share for 1993 to 1996 was computed
using the weighted average number of outstanding shares of NSU Common Stock
during each period presented adjusted for the Distribution of one share of
ENStar Common Stock for every three shares of NSU Common Stock outstanding.

-13-
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION

The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Consolidated
Financial Statements and the Notes thereto included elsewhere in this
Prospectus. This Prospectus contains, in addition to historical information,
forward-looking statements that involve risks and uncertainties. The Company's
actual results could differ materially from the results discussed in the
forward-looking statements. Factors that could cause or contribute to such
differences include those discussed below, as well as those discussed elsewhere
in this prospectus. See "Risk Factors."

GENERAL

ENStar is a holding company. Its principal subsidiaries are Americable,
Enstar Networking and Transition. ENStar also owns 1,025,000 shares of common
stock of CorVel Corporation ("CorVel"), or an approximate 25% interest in
CorVel, a provider of cost containment and managed care services designed to
address the medical costs of workers' compensation. ENStar's investment in
CorVel is accounted for as an unconsolidated subsidiary using the equity method
of accounting. The common stock of CorVel is included on the Nasdaq National
Market under the symbol CRVL.

As described in Note 2 to the Consolidated Financial Statements of ENStar,
the Consolidated Statements of Operations of ENStar include an allocation of
general and administrative costs incurred by NSU prior to the consummation of
the Reorganization Transactions in the management of the operating companies,
investment holding and other assets of ENStar. Management believes these
allocations are reasonable and present the operations of ENStar as though it has
been operated on a stand alone basis prior to the consummation of the
Reorganization Transactions.

Prior to 1997, Enstar Networking operated as the network integration
business of Americable. Enstar Networking was organized in April 1997 to
distinctly focus the networking service activities from the traditional
distribution and manufacturing operations of Americable. Enstar Networking was
incorporated on January 1, 1998. The separate results of operations for Enstar
Networking have been prepared from the books and records of Americable for all
periods presented. The results of operations include an allocation of general
and administrative expenses for certain items such as accounting, human
resources and information systems along with facility related expenses.
Management believes these allocations are reasonable and present the operations
of Enstar Networking and Americable as though they had operated as separate
businesses.

During 1997, Enstar Networking made significant investments in new sales,
consulting, engineering and technical personnel as part of its effort to build a
network services organization. As part of this strategy, Enstar Networking has
shifted its focus from historical commodity-based networking and connectivity
hardware sales towards more service oriented solutions. As part of this change,
the Company experienced a significant decrease in revenues and increased
operating expenses resulting in an operating loss of approximately $2.9 million.
Enstar Networking expects to incur an operating loss in 1998 as it continues to
build its network service and security consulting practice.

Historically, in excess of 90% of Transition's revenues have been derived
from the sale of its media conversion and related LAN products. These products
have life cycles of 18 to 36 months and are generally sold based on price,
availability and functionality. More recently, Transition has focused its
product development and marketing efforts on expanding its conversion technology
based products. In addition, the company provides related LAN products, such as
hubs and transceivers, that integrate with the conversion technologies to enable
network expansion. Transition's future operations are highly dependent on its
ability to introduce conversion technology based products on a timely basis, at
competitive prices that meet customer demands.

-14-
<PAGE>

The following are summarized operating results for ENStar's operating
subsidiaries for the years ended December 31, 1997, 1996 and 1995 (in
thousands):

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Revenues
Americable . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,656 $ 11,343 $ 11,458
Enstar Networking. . . . . . . . . . . . . . . . . . . . . . . 26,976 37,324 30,702
Transition . . . . . . . . . . . . . . . . . . . . . . . . . . 17,176 17,055 14,266
Eliminations . . . . . . . . . . . . . . . . . . . . . . . . . (1,456) (1,599) (1,535)
-------- -------- --------
$ 54,352 $ 64,123 $ 54,891
-------- -------- --------
-------- -------- --------

Gross Profit
Americable . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,758 $ 2,761 $ 3,131
Enstar Networking. . . . . . . . . . . . . . . . . . . . . . . 5,759 8,239 6,848
Transition . . . . . . . . . . . . . . . . . . . . . . . . . . 6,713 5,837 5,387
-------- -------- --------
$ 15,230 $ 16,837 $ 15,366
-------- -------- --------
-------- -------- --------

Selling, General and Administrative Expenses
Americable . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,357 $ 2,823 $ 2,575
Enstar Networking. . . . . . . . . . . . . . . . . . . . . . . 8,621 7,006 6,239
Transition . . . . . . . . . . . . . . . . . . . . . . . . . . 6,926 5,934 4,465
Allocable corporate expenses . . . . . . . . . . . . . . . . . 1,305 1,127 1,054
-------- -------- --------
$ 20,209 $ 16,890 $ 14,333
-------- -------- --------
-------- -------- --------

Operating Income (Loss)
Americable . . . . . . . . . . . . . . . . . . . . . . . . . . $ (599) $ (62) $ 556
Enstar Networking. . . . . . . . . . . . . . . . . . . . . . . (2,862) 1,233 609
Transition . . . . . . . . . . . . . . . . . . . . . . . . . . (213) (97) 922
Allocable corporate expenses . . . . . . . . . . . . . . . . . (1,305) (1,127) (1,054)
-------- -------- --------
$ (4,979) $ (53) $ 1,033
-------- -------- --------
-------- -------- --------
</TABLE>

RESULTS OF OPERATIONS

1997 versus 1996

Consolidated revenues decreased approximately $9.8 million, or 15%, to
$54.4 million from $64.1 million in 1996.

Revenues at Americable increased $313,000, or 3%, to approximately $11.6
million. This includes increased sales of cable assemblies of approximately
$500,000 due primarily to higher demand of fiber optic and custom OEM
assemblies. In addition, sales of networking products increased approximately
$200,000 due to higher demand. Sales of bulk cable and other connectivity
products decreased approximately $400,000, due primarily to lower volume to
contractors and resellers. Americable expects that its volume of sales of cable
assemblies will increase and its volume of networking products will decrease as
it focuses its sales and marketing efforts on its value-added connectivity
products which generally carry higher gross profit margins.

Revenues at Enstar Networking decreased approximately $10.3 million, or
28%, to $27 million. This includes decreased sales of networking products of
approximately $9.5 million and commodity-based structured wiring products of
approximately $3.1 million which reflects the company's shift from a
distributor/reseller of hardware towards more service oriented solutions.
Included in these amounts is approximately $6.1 million of lower sales to two
large customers. Offsetting these reductions was approximately $1 million of
increased revenues from network integration and structure wiring services along
with approximately $1.3 million of revenue from network security products due to
higher demand. Enstar Networking expects that its sales volume of networking
products will continue to decrease as it focuses its sales and marketing efforts
on developing and expanding its service offerings.

Revenues at Transition increased $121,000, or 1%, to approximately $17.2
million. Sales of Transition's media and rate conversion products increased
approximately $2.5 million or 36% to $9.3 million, reflecting additional
revenues from new products and product enhancements introduced during 1996 and
1997. Sales from new product introductions and enhancements accounted for
approximately 16% of net sales for 1997 versus 21% for 1996. Sales of
supporting LAN products decreased approximately $2.5 million or 20%, to $7.8
million due primarily to reduced sales of Ethernet hubs and switches which
reflects Transition's shift in product strategy towards conversion type
products. Sales to domestic customers of approximately $11.2 million and to
international customers of approximately $6 million, were relatively unchanged
from 1996.

-15-
<PAGE>

Sales to international customers accounted for approximately 35% of net
sales in 1997 and 1996, respectively. Transition's ability to maintain its
present level of sales and sales growth is highly dependent upon its ability to
offer new products that meet customer's demands in a rapidly changing market,
particularly in light of the relatively short life cycle of its products.

Consolidated gross profit, as a percent of revenues, increased to 28% in
1997 as compared to 26.3% in 1996. Margins at Transition increased to 39.1% from
34.2% due primarily to increased sales of higher margin media conversion
products along with cost reductions realized on certain component parts.
Decreased margins at Americable, from 24.3% to 23.7%, are primarily due to
unfavorable labor variances resulting from the expansion of its fiber optic
manufacturing operation. Margins at Enstar Networking decreased to 21.3% from
22.1% primarily due to increased competition for structured wiring and network
hardware products. ENStar expects its gross profit margins to continue to
decline in 1998 due to expected competitive pricing pressures on products and
services sold by each of its operating companies.

ENStar's selling, general and administrative expenses increased
approximately $3.3 million or 19.7%, to $20.2 million from $16.9 million in
1996. The increase in operating expenses at Americable reflects increased
expenses of approximately $300,000 primarily due to the addition of sales,
purchasing and product management personnel along with approximately $90,000 of
higher catalog and marketing related expenses. In addition, there was
approximately $150,000 of higher rent, depreciation and other related expenses
associated with its facility remodeling.

Enstar Networking had increased operating expenses of approximately $1.6
million, or 23%. This includes approximately $1 million of increased salaries,
benefits, training and other related expenses due to the addition of new sales,
consulting and engineering personnel. The company also had approximately
$205,000 of increased expenses due to marketing related costs associated with
the introduction of Enstar Networking and approximately $210,000 of higher costs
related to the reorganization of its branch operations. In addition, this
increase includes approximately $200,000 of higher facility related and other
general and administrative expenses associated with the increased level of
personnel.

Transition had increased operating expenses of approximately $1 million, or
17%, which reflects increased sales and marketing expenses of approximately
$810,000 due primarily to the addition of new sales and product management
personnel in addition to higher advertising, promotional and related expenses
associated with the introduction of Transition's new product strategy. This
also includes approximately $300,000 of increased general and administrative
expenses due primarily to the addition of support personnel, higher recruiting
and other employee related expenses. This was offset by approximately $125,000
of decreased engineering expenses which reflects a reduction in development and
personnel costs associated with Transition's advanced LAN products. In an effort
to successfully develop and launch new advanced LAN products, Transition
anticipates the increased levels of spending on sales, marketing and promotional
costs to continue during 1998. If such increased level of spending does not
result in the timely introduction of commercially successful products,
Transition may experience significantly reduced levels of sales growth and
operating results.

ENStar's research and development expenses (incurred exclusively within
Transition) were approximately $1.4 million and $1.5 million for 1997 and 1996,
respectively.

Corporate expenses increased $178,000, or 16% primarily due to higher
professional fees.

Net interest expense increased $605,000 to $809,000 from $204,000 in 1996,
due primarily to the higher level of ENStar subordinated debentures in addition
to higher borrowings under the Americable credit facility.

The income tax benefit in 1997 and 1996 reflects ENStar's estimated
effective annual tax rate. See Note 6 to Consolidated Financial Statements of
ENStar.

Equity in earnings of unconsolidated subsidiary increased $45,000 to
approximately $1.3 million, which is a result of higher earnings at CorVel
offset slightly by the effect of a lower ownership interest during the first
half of 1997. CorVel's net earnings for the twelve months ended December 31,
1997 were approximately $9.3 million, an increase of approximately $1 million or
12% from the previous year. Further information with respect to the results of
operations of CorVel is contained in the Management's discussion and Analysis of
Financial Condition and Results of Operations section of its annual and
Quarterly reports as filed on Forms 10-K and 10-Q with the Commission.

-16-
<PAGE>

1996 versus 1995

Consolidated revenues increased $9.2 million, or 17%, to $64.1 million from
$54.9 million in 1995.

Revenues at Americable were relatively unchanged in 1996 as compared with
1995. Sales of networking products increased approximately $1.3 million to $2.2
million due to higher demand. This was offset by decreased sales of bulk cable
and other connectivity products of approximately $1.2 million, due primarily to
lower volume of sales to contractors and resellers and lower demand for certain
types of bulk cable due to increased market supply of such product in 1996.

Revenues at Enstar Networking increased approximately $6.6 million, or 22%,
to $37.3 million. This includes increased revenues of $7 million resulting from
higher demand for networking products. Of this amount, approximately $3.2
million of sales were attributable to higher volume of networking products with
two large customers. The increase in revenue at Enstar Networking also includes
approximately $800,000 of higher volume of service revenues due to increased
focus on services and the addition of technical personnel. Offsetting these
increases was approximately $1.2 million of lower sales of commodity-based
structure wiring products due to the Company's focus towards networking
services.

Revenues at Transition increased approximately $2.8 million, or 20%, to
$17.1 million. Sales of Transition's advanced LAN products increased
approximately $1.2 million or 79% to $2.6 million, reflecting additional
revenues from new products and product enhancements introduced during 1995 and
1996. Sales from new product introductions and enhancements accounted for
approximately 21% of net sales for 1996 versus 9% for 1995. Sales of basic LAN
and terminal products increased approximately $1.6 million, or 14%, to $14.5
million. Sales to domestic customers increased approximately $2 million, or 24%,
to $11.1 million which primarily reflects higher demand for Transition's
products. Sales to international customers increased approximately $800,000, or
15%, to $6 million, which was primarily a result of the addition of new
customers. Sales to international customers accounted for approximately 35% and
37% of net sales in 1996 and 1995, respectively.

Consolidated gross profit, as a percent of revenues, decreased to 26.3% in
1996 as compared to 28% in 1996. Decreased margins at Americable are primarily
attributable to a higher volume of lower margin networking products and lower
pricing on cable due to competition and overall higher market supply on certain
types of bulk cable. Decreased margins at Transition are primarily the result
of approximately $500,000 of inventory write-downs recorded in the fourth
quarter of 1996. Margins at Enstar Networking were relatively unchanged between
years.

ENStar's selling, general and administrative expenses increased
approximately $2.6 million or 17.8% to $16.9 million from $14.3 million in 1995.
Operating expenses at Americable increased $248,000, or 9.7% to $2.8 million
which is primarily a result of higher selling expenses attributable to the
addition of sales and sales support personnel along with related training and
education costs.

The increase in operating expenses at Enstar Networking reflects increased
selling expenses of approximately $340,000 due to higher sales salaries,
commissions and related expenses and approximately $422,000 of higher
engineering expenses due to the addition of technical and engineering personnel.

Transition had increased operating expenses of approximately $1.5 million,
or 33%, which reflects increased engineering expenses of approximately $520,000
due to the addition of engineering personnel associated with new product
development. In addition, this increase also reflects higher sales and marketing
expenses of approximately $890,000, associated with advertising, participation
in trade shows, and other promotional expenses.

ENStar's research and development expenses (incurred exclusively within
Transition) were approximately $1.5 million in 1996, compared to approximately
$1 million in 1995. The increase was due to the addition of new engineering
personnel associated with new product development.

Corporate expenses increased approximately $73,000, or 7% primarily due to
higher professional fees.

Net interest expense decreased $43,000 to $204,000 from $247,000 in 1995,
due primarily to lower interest rates between years under the Americable and
Transition credit facilities.

The income tax provision (benefit) in 1996 and 1995 reflects ENStar's
estimated effective annual tax rate. See Note 6 to Consolidated Financial
Statements of ENStar.

-17-
<PAGE>

Equity in earnings of the Company's unconsolidated subsidiary increased
approximately $100,000 to $1.3 million from $1.2 million in 1995, which is a
result of higher earnings at CorVel. CorVel's net earnings for the twelve months
ended December 31, 1996 were approximately $8.2 million, an increase of
approximately $1.2 million or 17% from the previous year.

CAPITAL RESOURCES AND LIQUIDITY

During 1997, ENStar experienced cash flow deficits from operations due
primarily to the losses incurred at its operating companies. In certain prior
years, ENStar has experienced fluctuations in its working capital, which are
primarily attributable to the increase in receivables and inventories associated
with growth in sales and timing of payments on accounts payable. Cash used in
operations was approximately $1.8 million in 1997 versus $72,000 in 1996.

ENStar does not have the use of cash generated by CorVel. Also, since its
initial public offering in 1991, CorVel has not declared any dividends and has
indicated that it does not anticipate doing so for the foreseeable future.
ENStar may from time to time, depending on market conditions and other factors,
sell a portion of its CorVel holdings. The ability of ENStar to sell its CorVel
holdings is limited, however, to sales pursuant to Rule 144 of the Securities
Act of 1933 and the volume limitations thereof, and to private negotiated sales,
which may adversely affect the ability of ENStar to sell a large portion of the
CorVel holdings at a given time.

In November 1996, ENStar commenced a program (the "Debenture Program"),
similar to one previously maintained by NSU, whereby it sells subordinated
debentures of various maturities to primarily individual investors. The
debentures are offered on a continuous basis at interest rates that change from
time to time depending on market conditions. At December 31, 1997, the Company
had approximately $16.3 million principal amount of subordinated debentures
outstanding with weighted average interest rate of 9.62%. Long-term debt
proceeds of approximately $15.2 million represents the amount of new debentures
sold for the year ended December 31, 1997. Approximately $135,000 of debentures
are scheduled to mature during the fourth quarter of 1998.

In June 1997, the Company commenced a modified "Dutch Auction" self tender
offer for the repurchase of shares of its common stock. This tender offer,
which expired in July 1997, resulted in the Company's purchase and retirement of
37,290 shares of its common stock at $6.25 per share or an aggregate cost of
approximately $233,000.

Americable and Transition maintain revolving line of credit facilities with
their principal bank to provide borrowings up to $4 million, respectively, due
in May and June 1998. Borrowings under these facilities are based on eligible
accounts receivable and inventory with interest at prime (8.5% at December 31,
1997). At December 31, 1997, there were aggregate outstanding borrowings of
$2,680,000 and approximately $2 million of available borrowings under these
credit facilities. In September 1997, Americable obtained the necessary waivers
from its bank to waive its compliance with certain financial covenants and amend
the terms of its credit agreement. Under the terms of the amended credit
agreement, ENStar is required to make capital contributions to Americable to the
extent Americable (including Enstar Networking) incurs pretax losses in excess
of specified levels. At December 31, 1997, the companies were in compliance
with or had obtained waivers for all covenants under these agreements.

During 1997, ENStar provided an aggregate of $348,000 in cash to Americable
and Enstar Networking pursuant to the terms of the amended credit agreement.
Additional cash investments from ENStar are expected in 1998 to fund anticipated
operating losses and capital expenditures.

In February 1998, the Company announced a stock repurchase plan pursuant to
which the Company plans to repurchase up to 350,000 shares of its common stock
from time-to-time in open market or privately negotiated transactions.

ENStar expects to be able to fund its working capital and capital
expenditures along with any repurchases of common stock for 1998 with cash flow
from operations along with available cash and cash equivalents and amounts
available under the credit facilities of its operating companies. At March 16,
1998, ENStar had approximately $13.2 million of cash and cash equivalents,
excluding cash of its operating subsidiaries. During 1998, ENStar's operating
plans call for approximately $1.7 million in capital expenditures.

-18-
<PAGE>

BUSINESS

GENERAL

The Company directly employed five management and administrative employees
as of April 17, 1998.

UNCONSOLIDATED SUBSIDIARY

CorVel. Since its initial public offering in June 1991, CorVel has been
operated as an independent company. As a less-than-majority-owned subsidiary of
the Company, CorVel's operations have not been consolidated with ENStar, and
ENStar's investment in CorVel is accounted for under the equity method of
accounting. The following summary of CorVel's business has been prepared from
information reported by CorVel. Additional information regarding CorVel is
available from the reports and other documents prepared and filed by CorVel with
the Commission.

CorVel is an independent nationwide provider of medical cost containment
and managed care services designed to address escalating medical costs. CorVel's
services include preferred provider organizations, automated medical fee
auditing, medical case management, independent medical examinations, utilization
review and vocational rehabilitation services. Such services are provided to
insurance companies, third party administrators and employers to assist them in
managing the medical costs and monitoring the quality of care associated with
medical claims.

Since its initial public offering in June 1991, Jeffrey J. Michael and
Peter E. Flynn, officers of ENStar, have been members of the Board of Directors
of CorVel. Based on the past service of Messrs. Michael and Flynn on CorVel's
Board of Directors and the Company's position as a significant shareholder of
CorVel, the Company believes that Messrs. Michael and Flynn will continue to
serve as members of the CorVel Board of Directors and be nominated for
re-election to the CorVel Board at the next annual meeting of stockholders of
CorVel. There are no agreements, however, between ENStar and CorVel or any of
CorVel's stockholders requiring the nomination of Messrs. Michael and Flynn or
any designees of ENStar for election as directors of CorVel.

In connection with the Distribution, ENStar transferred all of its CorVel
Common Stock to Americable to satisfy certain federal income tax requirements
relating to the Reorganization Transactions. Neither ENStar nor Americable has
any agreement with CorVel requiring CorVel to register the shares of CorVel
Common Stock. In the absence of registration of its CorVel Common Stock, the
ability of ENStar to sell the holdings of CorVel Common Stock will be limited to
sales pursuant to Rule 144 of the Securities Act, and the volume limitations
thereof, and to private negotiated sales, which may adversely affect the ability
of ENStar to sell a large portion of holdings of CorVel Common Stock at a given
time.

-19-
<PAGE>

OPERATING SUBSIDIARIES

GENERAL

AMERICABLE. Americable was organized as a Minnesota corporation in 1981 and
was acquired by NSU in December 1986. Americable is a distributor of premise
wiring, connectivity products, and low-end networking electronics. As a
value-added distributor, Americable supplies a wide array of voice and data
communication related products such as cable (both copper and fiber optic),
cable assemblies, components (blocks, jacks, connectors, patch cords, patch
panels) and networking hardware. The principal focus of Americable's
distribution business, is to provide quality products, prompt reliable delivery
of such products and strong customer service both before and after the products
are sold. Americable sells to a wide range of customers throughout the United
States in the voice and data communications aftermarket, including contractors,
resellers, systems integrators, and installers.

ENSTAR NETWORKING. Enstar Networking is a network integrator that provides
services to design, build, maintain and protect corporate network
infrastructures. The company's mission is "to provide our clients with
technical services and solutions that improve the performance and integrity of
their networks." The company offers customized, integrated solutions through
three strategic business units:

Security Integration Group ("SIG") is a team of consultants that
provide information security consulting services for customers using
Internet and intranetwork applications. These services include policy
development, architecture design, business impact analysis, access,
auditing, continuity and custom training services.

Network Integration Services ("NIS") include a variety of customized,
integrated solutions to build, manage and maintain high performance
local area networks ("LAN") and wide area networks ("WAN"). These
service offerings include design services such as requirements
definition and project planning along with the implementation and
support of a select platform of networking hardware and software.
Enstar Networking also provides a variety of solutions to remotely
manage and maintain LAN's and WAN's for its customers.

Structured Wiring Services ("SWS") involve the design and installation
of network cabling infrastructures for voice and data communications.
Through a quality-trained team of project managers and technicians,
Enstar Networking provides a comprehensive offering of cabling design,
installation, certification and documentation services for category 5
copper and fiber optic systems.

Enstar Networking previously operated as the network integration business
of Americable. As part of its business strategy since the early 1990's,
Americable had expanded the level of network integration services provided to
end-user customers such as network design, implementation, management and
maintenance. Enstar Networking was organized in April 1997 to distinctly focus
the networking service activities from the traditional distribution and
manufacturing operations of Americable.

TRANSITION. Transition develops and distributes media, rate and transport
conversion products that enable bandwidth requirements. Transition's products
are designed to protect the investment made in network infrastructure while
optimizing performance capacity. Focused on providing conversion tools between
multiple technologies such as Ethernet to Fast Ethernet, Fiber Distributed Data
Interface ("FDDI"), Asychonous Transfer Mode ("ATM"), and Gigabit, the company
takes a unique approach to conversion technology. All of its conversion
products are designed to be transparent to the network. The principle of
conversion technology is to make the necessary adaptation while not affecting
the performance, nature or the appearance of the network to the users or
devices.

Physical connectivity devices enable computing and other electronic devices
to communicate over a LAN. These devices include managed and unmanaged hubs,
transceivers, media converters and other related fiber based networking devices.
Transition's products include media, rate, and protocol conversion and related
LAN products. Transition sells its products to a number of volume distributors
and resellers throughout the United States and 50 countries worldwide.

-20-
<PAGE>

Media Conversion - connecting unlike media types, predominantly copper
to fiber;

Rate Conversion - connecting unlike rates within a protocol, such as
Ethernet to Fast Ethernet; and

Transport Conversion - connecting unlike transport protocols, such as
Fast Ethernet to FDDI, within the LAN environment.

In addition, the company provides related LAN products, such as hubs and
transceivers, that integrate with the conversion technologies to enable network
expansion. Transition's future operations are highly dependent on its ability
to introduce conversion technology based products on a timely basis that meet
customer demands.

INDUSTRY

A growing number of organizations are re-engineering their businesses and
are using PC-based network technology to enhance productivity. PC networks
increase speed and flexibility, provide improved functionality to end-users and
provide greater productivity, often at lower costs. The growth in demand for
personal computers, along with recent advances in networking technology, have
led to an increase in demand for interconnected LANs and WANs. Such networks
facilitate efficient and rapid data communications among connected work groups
and departments providing for more effective utilization of information and
computing resources. As LANs have proliferated, demand for multi-vendor
interoperability has led to industry standard network protocols and access
methods such as Ethernet and Token-Ring.

More recently there has been an increasing demand to connect users of LANs
in other geographic areas using WANs. Applications such as online services,
electronic mail, sharing of databases, multi-site product development and
transaction processing are leading the demand for the inter-networking of LANs
and WANs. The integration of LANs and WANs requires data communication products
which efficiently, reliably and quickly transmit data to appropriate locations.

In the face of this rapidly changing technological environment, the
decision-making process that organizations face when planning, selecting and
implementing information technology solutions is growing more complex.
Organizations must select from numerous product options with shortening life
cycles. Although networks enhance business productivity, they typically present
complex management problems and increased administrative costs. Thus, many
organizations find it increasingly difficult and costly to maintain the internal
infrastructure needed to support their networks. As a result of these trends,
companies increasingly seek to outsource the management and support of their PC
network infrastructure.

According to Data Com Market Forecast, it is estimated that in 1997 the
overall market in the United States for networking products and services was
approximately $80 billion.

BUSINESS STRATEGY

AMERICABLE. Americable's objective is to be a leading provider of
value-added connectivity products throughout the United States. To meet this
goal, Americable believes it must seek to maintain its current customer
relationships and expand its customer base in the regions in which it operates,
develop strong relationships with its key suppliers, and develop and enhance its
value-added offerings.

During 1997, approximately 2,500 customers purchased products from
Americable. Management at Americable believes that preserving and enhancing
these relationships is a constant priority. Continuous quality improvement in
its operations along with expansion of its fiber optic product offerings are
some of the means that Americable utilizes to enhance its customer
relationships.

-21-
<PAGE>

Management at Americable also believes that developing strong relationships
with the leading manufacturers allows Americable to offer its customers name
brand products that provide the best value in meeting their needs. Americable
believes that utilizing a select range of suppliers allows it to provide
superior customer service because its technical personnel are more familiar with
the products sold and because such high quality products are generally more
reliable. Further, such strong relationships result in greater continuity of
product supply.

ENSTAR NETWORKING. Enstar Networking's objective is to be a leading
provider of information technology (IT) services to manage and secure corporate
networks. Its focus is on medium to large sized enterprises that deploy complex
network structures involving public networks such as the Internet for critical
business applications. Enstar Networking believes that its expertise in the
design and implementation of networks along with its specialized understanding
of security requirements uniquely positions them as a "One Company, One Call"
provider for its customers. To achieve its objectives, the company is pursuing
the following strategies:

- Implement its recently developed suite of customized security
services including assessment, policy development, access and
authentication, auditing, business continuation and training in
each of its key regional service centers. Enstar Networking
plans to continue to add new services focused on remote security
management and enhance other service offerings to meet its
customer's security needs within the context of an evolving
enterprise environment.

- Build its consulting services organization. The company's
Security Integration Group was formed in April 1997 and currently
provides fee-based, on-site consulting services that can provide
an evaluation of existing network security systems, analyze
potential exposures to security breaches and suggest corrective
action. During 1998, the company plans to expand the number of
SIG consultants in order to service its customers' demand for
security services.

- Develop and market a service offering which provides network
monitoring capabilities to customers looking to outsource the
management of its LAN / WAN. Through the company's existing
Technical Assistance Center ("TAC") and staff of system
engineers, it can provide remote network monitoring, remote
security management and network administration.

- Create close and long-term relationships with a focused group of
customers to develop a source for repeatable business and as a
result of high satisfaction ratios, a source of business
referrals. During 1997, approximately 2,000 customers purchased
products or services from Enstar Networking. In 1998, the
company intends to concentrate its sales and marketing efforts on
a more focused number of customers in order to provide its full
array of service offerings and develop more successful
long-term customer relationships.

- Maintain strong relationships with the leading manufacturers in
the networking industry in order to offer its customers high
quality solutions. Enstar Networking has developed relationships
with Bay Networks, Inc, Check Point Software Technologies, Ltd.,
Cisco Systems, Inc., Internet Security Systems, Inc. and Security
Dynamics, Inc.

- Expand its market presence and geographic coverage through the
addition of new sales, engineering and technical personnel in new
regional locations, primarily focused in the Southwest and
Midwest. The company's strategy is to open smaller regional
offices consisting of a few sales, engineering and consulting
personnel that are supported by its larger regional service
centers in Dallas, Texas and Minneapolis, Minnesota.

TRANSITION. The market for Transition's products is characterized by rapid
technological change, constantly evolving industry standards and rigorous
competition with respect to timely product innovation. Because the introduction
of products embodying new technology and the emergence of new industry standards
can render existing products obsolete and unmarketable, Transition believes that
its future success will depend upon its ability to develop, manufacture and
market new products and enhancements to existing products on a cost-effective
and timely basis. Transition seeks to identify niche market opportunities for
new or enhanced products and quickly respond by offering a new or enhanced
product that may have greater capabilities, better functionability or
flexibility, greater ease of use or equivalent capabilities or functionability
but a lower price point than other competitive products.

-22-
<PAGE>

As LANs have proliferated, demand for multi-vendor interoperability has led
to industry standard network protocols and access methods such as Ethernet, Fast
Ethernet, Token-Ring and FDDI. Transition has developed the majority of its LAN
products using industry standards, primarily Ethernet. Ethernet's cabling media
has evolved from coaxial cable to its associated 10BaseTL fiber optic cabling.
Management at Transition believes that the LAN products market will continue to
be driven by the migration of end-users to new applications that demand more
speed, distance and bandwidth. Accordingly, Transition's research and
development efforts have been targeted at high speed (100Mbs+) LANs and the
integration of installed legacy systems to these new platforms.

PRODUCTS AND SERVICES

AMERICABLE. The following is a summary of Americable's sales by principal
product group for 1997:

<TABLE>
<CAPTION>
As a Percent of Sales
---------------------
<S> <C>
Networking Products . . . . . . . . . . 28%
Cable Assemblies. . . . . . . . . . . . 38%
Bulk Cable. . . . . . . . . . . . . . . 14%
Other Connectivity Products . . . . . . 20%
</TABLE>

Americable maintains a wide variety of high-quality products in its
inventory. Product inventory includes connectivity products such as bulk cable,
connectors, patch panels, racks and other cable accessories. As a distributor,
Americable generally inventories products from multiple manufacturers. Principal
manufacturers of connectivity products include Berk-Tek, Inc., Amp Incorporated,
General Cable Corp., The Siemon Company and Leviton Manufacturing, Inc.

Americable also maintains an integrated, real-time, on-line computerized
system for order entry, fulfillment and inventory control. This on-line
computer system allows sales personnel to advise customers over the phone of
product specifications, availability and order status. All orders are normally
shipped within 24 hours of receipt and, when necessary, can be shipped on a
"same-day" basis.

Americable seeks to add value for its customers by providing superior
customer service. All of Americable's sales representatives are trained to
assist customers in product selection. The sales representatives are supported
by technical personnel who have a broad range of expertise in various cabling
and networking technologies.

Americable, working to its customers' specifications, can manufacture
custom designed products such as copper, fiber-optic, small computer system
interface ("SCSI") and AS/400 cable assemblies and subassemblies. All
Americable manufactured products are subject to strict quality control standards
to insure that they are of the same high quality as other, vendor manufactured,
distributed products.

ENSTAR NETWORKING. The following is a summary of the Enstar Networking's
revenues by principal business unit for 1997:

<TABLE>
<CAPTION>
Percent of Revenues
-------------------
<S> <C>
Security Integration Group
Products and Consulting . . . . . . . 5%

Network Integration Services
Products. . . . . . . . . . . . . . . 49%
Services. . . . . . . . . . . . . . . 3%

Structured Wiring Services
Products. . . . . . . . . . . . . . . 29%
Installation and Consulting . . . . . 14%
</TABLE>

Revenues from services and installation in 1997 represented 17% of Enstar
Networking's total revenues, of which approximately 9% represents services
performed by Enstar Networking personnel. The remaining portion of these
services are rendered primarily through subcontractors engaged by Enstar
Networking. Enstar Networking expects to continue utilizing the services of
outside contractors in addition to its internal personnel in meeting its
customers' needs. Enstar Networking believes there are opportunities to
increase Enstar Networking's overall gross margins by increasing the volume of
services that it currently offers to its customers and intends to focus on
increasing its service revenues.

-23-
<PAGE>

In an effort to offer its customers a "One Company, One Call" solution,
each of the above products and service groups is delivered through a single
sales organization. Each unit works in concert with the others to leverage
Enstar Networking's service offerings across its customer base. Set forth
below is a description of each business unit's operations.

SECURITY INTEGRATION GROUP

Enstar Networking has been involved in the network security market
since June 1996 when it became an authorized value-added reseller of
Check Point Software Technologies, Ltd.'s ("Check Point")
FireWall-1-TM. In April 1997, it expanded its network security
operation through the creation of SIG which offers the following
consulting services:

ASSESSMENT SERVICES - This includes services to discover and map out a
customer's existing network and security hardware configuration and
provide suggestions for the development of network security plans.
These services can also involve a Business Impact Analysis which
involves an overall review of a customer's general information
security and basic recommendations on how a customer can improve their
overall information security practices.

POLICY DEVELOPMENT SERVICES - These services include any consulting
activities that assist a customer in the development, approval
process, training and implementation of a corporate-wide information
security policy. Enstar Networking will develop a customized
implementation of policies and standards on areas such as data
confidentiality, password management and control, equipment use and
accountability, anti-virus, Internet or e-mail use policy, physical
security and remote access.

ACCESS SERVICES - These services involve the planning, installation
and maintenance of products that assist customers with policy and
security architecture enforcement including firewalls, encryption,
identification, authorization, and content security. Enstar
Networking is an authorized reseller of the Check Point Fire Wall-1, a
security product offered by Check Point Software Technologies, Ltd.,
in addition to products offered by Internet Security Systems Inc. and
Security Dynamics Technologies, Inc.

AUDITING SERVICES - This includes scanning and other services that
provide customers analysis of their network security and access
control to their various operating systems.

CONTINUITY SERVICES - This represents consulting services to assist
customers in the development, approval, training, and implementation
of a corporate-wide Disaster Recovery or Business Continuation Plan.
A Business Continuation Plan is a document developed in coordination
with clients to help assure the successful recovery of their critical
business units in the event of a catastrophe or disruption of
business.

CUSTOMIZED TRAINING SERVICES - These services include any information
security training or awareness related services rendered to a
customer. Enstar Networking is an authorized training center in
Dallas, Texas and Minneapolis, Minnesota for Check Point Certified
System Administrator and Check Point Certified System Engineer
training programs.

NETWORK INTEGRATION SERVICES

Enstar Networking offers the following customized networking services:

NETWORK DISCOVERY AND ANALYSIS - Through the combination of its
advanced engineering and project management teams, Enstar Networking
assists its customers with network discovery programs including
requirements design, detailed design, on-site hardware survey and
mapping, network baseline audits and implementation planning. These
services are designed to provide a customer with a broad overview of
their current networking capabilities and prepare a "roadmap" to help
them move to future technologies. These services are either offered
as part of an overall project or arranged separately as a billable
service.

NETWORK IMPLEMENTATION - Enstar Networking supplies, implements and
supports a select range of suppliers of electronics and software
platforms from manufacturers such as Cisco Systems Inc., Bay Networks,
Inc., Microsoft Corp. and Compaq Computer Corporation. Enstar
Networking's line of network products include concentrators, hubs,
switches and routers for both existing and emerging technologies such
as Ethernet, Token Ring, FDDI, Fast Ethernet and ATM. Enstar
Networking purchases a number of networking products through large
distributors such as Tech Data Corporation, Gates/Arrow and Ingram
Micro, Inc.

-24-
<PAGE>

In addition, Enstar Networking provides and installs network
management systems that provide its customers with the capability of
network troubleshooting, diagnostics, security, optimization and
proactive network maintenance all from a single workstation. Enstar
Networking also offers remote access products and services that allow
the end-user to operate outside of the office while still being able
to connect to their LAN.

NETWORK MAINTENANCE - Enstar Networking provides a broad line of
maintenance services including fixed fee network support, telephone
support, guaranteed response times, next business day on-site response
for problem resolution, "spare-in-the-air" hardware replacement and
cabling system diagnosis and repair. Through its Technical Assistance
Center (TAC), Enstar Networking can provide remote diagnostic
capabilities as part of its maintenance services. The TAC is capable
of receiving a customer call, remotely diagnosing the problem,
searching for an application solution and, if necessary, dispatching a
regional engineer to perform on-site troubleshooting.

REMOTE NETWORK MANAGEMENT AND MONITORING - Beginning in 1998, Enstar
Networking plans to introduce a line of services which will provide
network monitoring capabilities to customers looking to outsource the
management of its LAN/WAN. Through the TAC and staff of system
engineers we can provide network monitoring, router configuration,
network traffic analysis, and network administration.

REMOTE SECURITY MANAGEMENT - This program is designed to provide
customers with an outsourced firewall solution for their network.
From hardware to software configuration, Enstar Networking provides
its customers a solution to protect their corporate data via dial-up
connections and the Internet, without the capital and personnel costs
to maintain the firewall.

STRUCTURED WIRING SERVICES

Enstar Networking provides solutions to build network cabling
infrastructure for voice and data communications. The speed and
performance of a network is dependent upon the adequacy and bandwidth
of its cable plant. The company has a staff of consultants, project
managers, technicians and installers that provide project management,
design and installation of standards based category 5 and fiber optic
cabling systems. Enstar Networking will oversee the design and
implementation of projects involving multiple LANs across a WAN,
consisting of multi-vendor hardware products and several thousand
nodes. These projects generally range in size from $10,000 to
$250,000.

TRANSITION. Transition's products encompass three major areas of conversion
technology, which include (i) media conversion, (ii) rate conversion, and (iii)
transport conversion. Transition plans to introduce its first transport
conversion product in 1998. In addition, the company has a number of fiber and
copper-based supporting LAN products.

The following is a summary of sales by product group for 1997:

<TABLE>
<CAPTION>
PERCENT OF SALES
----------------
<S> <C>
Media Conversion. . . . . . . . . . 54%
Rate Conversion . . . . . . . . . . 1%(new in 1997)
Transport Conversion. . . . . . . . 0%(new in 1998)
Supporting Products . . . . . . . . 45%
</TABLE>

Media Conversion allows the connection of disparate media types to
achieve extended distances and speeds within LANs. Transition has the
widest product line in the world encompassing new technologies such as
Gigabit Ethernet and ATM, as well as 10MB Ethernet, 100MB Ethernet, and
Token Ring.

Rate Conversion allows for the connection of disparate speed types
within a LAN. Transition has two versions of a 10MB Ethernet to 100MB
Ethernet device that uses copper and fiber connections.

Transport Conversation allows for the connection of disparate protocol
types with a LAN. Transition has announced a FDDI to Fast Ethernet device
for delivery expected in the second quarter of 1998.

Supporting Products include both passive and active devices such as
hubs, transceivers, and baluns that integrate with conversion technologies
to enable network expansion. It also includes Transition's "Powerstar"
line of active hubs which convert S3x or AS/400 daisy chain topology to an
unshielded twisted pair star topology, thereby improving network
reliability and flexibility.

-25-
<PAGE>

MARKETING AND CUSTOMERS

AMERICABLE. Americable sells products to a number of installers, resellers,
other distributors and system integrators. Customer relationships are developed
both face-to-face and via the telephone.

Americable currently employs 28 telemarketing and sales support
representatives. The sales force is currently supplemented by 3 technical
service and product managers. Americable sales representatives undergo regular
training and attend company-sponsored classes in order to enhance their
technical knowledge.

Americable uses direct mailings, brochures and catalogs in marketing the
products that it distributes. Americable's catalog, which generally is
published every 18 to 24 months, is designed to provide its customers with not
only product specifications, but additional technical information to assist them
in connection with their system design. Americable's latest catalog was
released in April 1996.

During 1997 and 1996, no one customer accounted for more than 10% of
Americable's sales. In addition, in 1997 and 1996, Americable derived
approximately 68% and 76%, respectively, of its sales from its largest 100
customers.

ENSTAR NETWORKING. Enstar Networking provides its products and services to
customers in various industries including health care, financial services,
legal, manufacturing and education. Customer relationships are generally
developed by its outside sales representatives within a 100 mile radius of its
regional service center and satellite locations. Marketing efforts are directed
at Fortune 1000 and middle market corporations, and institutional users such as
hospitals and universities and are generally focused on customers
located in the states in which the company has offices. Through its primary
regional service centers, Enstar Networking provides its customers a full array
of services from each of its business units throughout all its locations.

Enstar Networking currently has sales personnel in the following states:
Georgia, Illinois, Texas, Minnesota, North Dakota, Colorado and California.
Enstar Networking adds and deletes locations on the basis of business
opportunities.

Enstar Networking currently employs 25 outside sales representatives in
addition to 15 sales support representatives. The sales force is currently
supplemented by 20 regional systems engineers and consultants, 35 technicians
and installers, and 2 corporate service managers. Enstar Networking sales
representatives undergo continuous training and attend company-sponsored
classesin order to enhance their technical expertise and marketing techniques.
Also, many of Enstar Networking sales and technical personnel attend
vendor-sponsored training and education programs mandated by such vendors in
order for the company to qualify as an authorized reseller of their products.

During 1997 and 1996, Enstar Networking derived approximately 43% and 52%,
respectively, of its sales from its largest 25 customers.

TRANSITION. Transition distributes its products through a number of volume
distributors and resellers throughout the United States and in over 50 countries
worldwide. Distributors and resellers purchase Transition's products at
standard discounts based on certain volume-based incentive programs.

Transition's international sales have accounted for a substantial portion
of its sales growth, coming primarily from the United Kingdom, South Africa,
Australia, and Sweden. During 1997 and 1996, revenues from outside the United
States accounted for approximately 35% of net sales.

Transition's continued growth will be dependent, in part, upon its ability
to expand its domestic and international distributor base with high quality
resellers. A significant benefit for a distributor or reseller is that
Transition does not sell directly to end-users. Transition's distributors and
resellers carry other products that are complementary to and compete with those
of Transition. These non-exclusive distributors and resellers may choose to
give higher priority to products of other suppliers or competitors.

Transition has several marketing programs to support the sale and
distribution of its products. Its marketing programs are designed to generate
sales leads for its distribution channels, as well as to enhance brand name
recognition. Transition's marketing activities include frequent participation
in industry trade shows, advertising in major trade publications, public
relations campaigns, the distribution of sales literature and product
specifications, and ongoing communications with its distributors. In addition,
Transition offers comprehensive pre- and post-sales technical support, product
training, and a strategic test partner program. Transition utilizes reseller
incentive programs such as co-op funds to increase localized print advertising
and name recognition.

-26-
<PAGE>

RESEARCH AND DEVELOPMENT

TRANSITION. Transition performs all of its research and development
activities at its headquarters in Eden Prairie, Minnesota. Transition believes
that its future success depends on its ability to achieve market acceptance of
new product offerings. The engineering staff has increased by 36% since the end
of 1994 to accelerate development in this area. Although there can be no
assurance that its development efforts will result in commercially successful
products, Transition intends to continue to make substantial investments in the
development of new and enhanced products. Research and development expenses
were approximately $1.0 million (7% of net sales) in 1995, $1.5 million (9% of
net sales) in 1996, and $1.4 million (8.1% of net sales) in 1997. For 1998,
Transition has budgeted research and development expenses of approximately $1.7
million.

MANUFACTURING

AMERICABLE. Americable's manufacturing operations consist of the
manufacture of custom or specialty cable assemblies including copper,
fiber-optic, small computer system interface (SCSI) and AS/400 cable assemblies
and subassemblies.

TRANSITION. Transition's manufacturing operations consist primarily of the
final assembly and quality control testing of materials, components and
subassemblies. Transition uses third parties to perform printed circuit board
assembly. Transition's products include certain components that are currently
available from single or limited sources and may require long order lead times.
Any reduction in supply or substantial change in costs of components could
affect Transition's ability to deliver its products in a timely and
cost-effective manner and may adversely impact Transition's operating results.
Approximately 10% of all products are manufactured outside the United States in
Ireland and Taiwan.

COMPETITION

AMERICABLE. Americable faces substantial competition from a large number of
companies, some of which are larger, have greater financial resources, broader
name recognition and, in many cases, lower product and operating costs than
Americable. Significant competitors include Anixter International, Inc.,
Anicom, Inc., Kent Electronics Corporation, Graybar, Inc., and a number of
smaller domestic companies, as well as product manufacturers outside the United
States.

ENSTAR NETWORKING. Enstar Networking faces substantial competition from a
large number of companies, some of which are larger, have greater financial
resources, broader name recognition and, in many cases, lower product and
operating costs than Enstar Networking. Enstar Networking faces competition
from large system integrators such as GE Capital Information Technology
Services, CompuCom Corporation, Vanstar Corporation and a significant number of
smaller regional network integrators.

TRANSITION. The industry in which Transition operates is highly
competitive, and Transition believes that such competition will continue to
intensify. The industry is characterized by rapid technological change, short
product life-cycles, frequent product introductions and evolving industry
standards. Transition competes with a number of independent companies focused
on designing and manufacturing products for the LAN market, including, among
others, Allied Telesyn International, AMP Incorporated, and Digi International.
Most of Transition's competitors are established companies with significantly
greater financial resources, more extensive business experience, and greater
market and service capabilities than Transition. There can be no assurance that
Transition will be able to compete successfully.

Transition's ability to compete successfully depends upon its ability to
adapt to market changes on a timely basis. There are many networking products
currently being offered in the market segments in which Transition competes.
Transition believes that customers evaluate competing products on the basis of
required product features for a particular installation, performance, price and
ease of use. In addition, after installation, customers evaluate the suppliers'
ability to provide readily accessible technical support, if required, and its
reliability when deciding on future orders for additional equipment. Failure to
obtain significant customer satisfaction or market share could have a material
adverse effect on Transition.

-27-
<PAGE>

PROPERTIES

AMERICABLE. Americable's principal distribution and manufacturing
operations are located in Minneapolis, Minnesota (39,000 square feet). This
facility includes office, warehouse and manufacturing space.

ENSTAR NETWORKING. Enstar Networking has its primary regional service
centers in Dallas, Texas (11,000 square feet) and Minneapolis, Minnesota (8,000
square feet). Enstar Networking also has branch operations in Fargo, North
Dakota and Atlanta, Georgia in addition to satellite offices in Austin, Texas,
Chicago, Illinois, San Jose, California, and Denver, Colorado.

TRANSITION. Transition's headquarters, including its executive and
corporate administration offices, manufacturing, sales and technical support are
located in Eden Prairie, Minnesota, which consists of approximately 27,000
square feet of leased space. Of this space, approximately 1,900 square feet is
occupied by ENStar's corporate offices.

All of the Company's facilities are leased. ENStar believes that the
leased facilities of its operating companies are adequate for their intended
use.

LEGAL PROCEEDINGS

The Company is engaged in routine litigation incidental to its business,
which management believes will not have a material adverse effect upon its
business.

REORGANIZATION TRANSACTIONS

Pursuant to the Reorganization Transaction, NSU merged with Michael and the
outstanding ENStar Common Stock was distributed to the shareholders of NSU in
the Distribution. As a result of the Distribution, ENStar ceased to be a
subsidiary of NSU and became a publicly owned company.

In connection with the Reorganization Transactions, Michael paid in full
all Michael Assumed Indebtedness within six months of consummation of the
Reorganization Transactions. Michael also agreed to pay, perform and discharge
all liabilities of NSU arising at any time prior to February 28, 1997 (the
effective date of the Reorganization Transactions (the "Effective Date")), other
than the following liabilities retained by NSU: (i) liabilities arising from the
assertion of dissenters rights by NSU shareholders in connection with the
Reorganization Transactions, and (ii) obligations under certain agreements
entered into in connection with the Reorganization Transactions.

In connection with the Reorganization Transactions, ENStar agreed to
indemnify Michael and any subsidiaries of Michael against certain liabilities
including: (i) all liabilities (other than the liabilities assumed by Michael)
of NSU or any NSU subsidiary, arising out of: (a) the liabilities transferred to
ENStar by NSU and (b) the transactions contemplated by the agreement governing
the Distribution (the "Distribution Agreement"), including the Distribution and
any taxes as a result of the Distribution; (ii) all liabilities arising from any
claim made by any shareholder of ENStar or by any shareholder or former
shareholder of NSU prior to the Effective Date relating to any act or omission
of NSU on or prior to the Effective Date in connection with the Reorganization
Transactions; (iii) all liabilities assumed by ENStar relating to the employee
benefit plans of NSU; (iv) any breach of the Distribution Agreement by ENStar;
and (v) damages, costs, and expenses including attorney's fees incurred in
defending and settling claims for such liabilities.

-28-
<PAGE>

In connection with the Reorganization Transactions, Michael agreed to
indemnify ENStar against: (i) all liabilities of NSU, Michael or any subsidiary
of NSU or Michael arising out of transactions or events entered into or
occurring after the Effective Date, or any action or inaction, including but not
limited to, contracts, commitments and litigation, with respect to, entered into
or based upon transactions or events occurring after the Effective Date with
respect to NSU, Michael, any subsidiary of NSU after the Effective Date or any
subsidiary of Michael, other than any liability arising out of liabilities
transferred to ENStar by NSU; (ii) all liabilities assumed by Michael; (iii) all
liabilities of Michael or any subsidiary of Michael; (iv) all liabilities
arising from any claim made by any current or former Michael stockholder or
shareholder of NSU after the Effective Date who was a Michael stockholder or NSU
shareholder immediately prior to the Effective Date relating to any act or
omission of Michael in connection with the Reorganization Transactions; (v) any
breach of the Distribution Agreement by NSU; and (vi) damages, costs and
expenses including attorney's fees incurred in defending and settling claims for
such obligations, expenses or liabilities.

-29-
<PAGE>

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS OF ENSTAR

The directors and executive officers of ENStar are as follows:

NAME AGE POSITION
------------------------------ --- ---------------------------------------------------
<S> <C> <C>
James H. Michael . . . . . . . 77 Chairman of the Board of Directors
Miles E. Efron . . . . . . . . 71 Director
Richard J. Braun . . . . . . . 53 Director
Jeffrey J. Michael . . . . . . 41 Director, President and Chief Executive Officer
Peter E. Flynn . . . . . . . . 38 Executive Vice President
Thomas S. Wargolet . . . . . . 34 Chief Financial Officer and Secretary
Ronald D. Newman . . . . . . . 33 President and Chief Operating Officer,
Enstar Networking
C.S. Mondelli. . . . . . . . . 47 President and Chief Executive Officer,
Transition
</TABLE>

Mr. James H. Michael has served as Chairman of the Board of ENStar since
March 1996. Mr. Michael served on the Board of Directors of North Star
Universal, Inc. ("NSU"), of which ENStar was a wholly owned subsidiary prior to
February 1997, and was the Chairman of the Board of NSU prior to July 1991.
Also prior to March 1996, Mr. Michael was Chairman of the Board of Michael
Foods, Inc. ("Michael"), into which NSU was merged in February 1997. Mr.
Michael is the father of Jeffrey J. Michael, ENStar's President and Chief
Executive Officer.

Mr. Miles E. Efron has served on the Board of Directors of ENStar since
March 1996. From July 1991 until February 1997, Mr. Efron served as Chairman
of the Board of Directors of NSU. Mr. Efron also is a director of Michael
and Medtox Laboratories.

Mr. Richard J. Braun has served as a director of ENStar since March 1996.
Mr. Braun served on the Board of Directors of NSU from 1994 to 1996. Since July
1996 he also has served as Chief Executive Officer and a Director of Medtox
Scientific, Inc., a company that provides laboratory and diagnostic testing
services. From 1994 to 1996, Mr. Braun acted as a private investor and provided
management consulting services to the health care and technology industries.
From 1992 to 1994, Mr. Braun served as Chief Operating Officer and a Director of
Employee Benefit Plans, Inc. (NYSE:EBP).

Mr. Jeffrey J. Michael has served as the President and Chief Executive
Officer of the Company since March 1996. Mr. Michael was an initial director
and officer (serving as President and Secretary) of ENStar at the time it was
organized by NSU in December 1995. Mr. Michael served as President and Chief
Executive Officer of NSU from December 1990 until February 1997. Mr. Michael
is the son of James H. Michael. Mr. Michael also is a director of Michael
and CorVel Corporation ("CorVel").

Mr. Peter E. Flynn has served as Executive Vice President of the Company
since March 1996. In addition, Mr. Flynn has served as President of Americable
since June 1997. Prior to such time, Mr. Flynn served as Executive Vice
President, Chief Financial Officer and Secretary of NSU. Mr. Flynn also served
as President and Chief Operating Officer of Transition from December 1992 until
July 1996. Prior to joining NSU in 1989, Mr. Flynn was an Audit Manager with
Arthur Andersen & Co. Mr. Flynn also serves as a director of CorVel.

Mr. Thomas S. Wargolet has served as Chief Financial Officer and Secretary
of the Company since March 1996. Prior to such time, Mr. Wargolet served as
Controller of NSU since September 1989. Mr. Wargolet was also the Director of
Finance of Americable from September 1991 until January 1995 and Vice President
of Finance and Operations from January 1995 to September 1997. Since September
1997, Mr. Wargolet has been the Vice President of Finance and Operations of
Enstar Networking. Prior to joining NSU in 1989, Mr. Wargolet was an Audit
Senior with Arthur Andersen & Co.

Mr. Ronald D. Newman has served as President of Enstar Networking since
September 1997 and Chief Operating Officer since March 1997. Mr. Newman was the
Regional Manager - Southwest Operations from March 1993 to February 1997 and
prior to that served in various sales capacities for Americable.

-30-
<PAGE>

Mr. C.S. (Sal) Mondelli joined Transition in February 1995 as Vice
President of Sales and Marketing, prior to becoming President and Chief
Executive Officer of Transition in May 1996. Prior to joining Transition Mr.
Mondelli was an Executive Vice President with Prodea Software Corporation and
served in a variety of marketing and management positions with IBM Corporation.

Officers of the Company are elected annually by the Board of Directors.
The current officers of the Company are expected to be re-elected to serve in
the same positions for the coming year.

COMPENSATION OF DIRECTORS OF ENSTAR

In 1997, the Company's non-employee directors received an annual retainer
of $8,000 for serving as members of the Company's Board of Directors. Directors
incurring travel expenses to attend meetings are reimbursed in full. Members of
committees receive an additional $300 for each committee meeting they attend.

Under the Stock Incentive Plan, each non-employee director of ENStar, upon
his or her initial election as a director, is granted an option to purchase
4,000 shares of Common Stock. Starting with the 1997 Annual Meeting, each
non-employee director of ENStar is also granted an option to purchase 1,000
shares of Common Stock on the date of the annual meeting of shareholders each
year if the director will remain in office immediately following such meeting.
The exercise price of each option is equal to 100 percent of the fair market
value per share on the date of grant. Such options are non-qualified stock
options, become exercisable six months after the date of grant and terminate on
the fifth anniversary of the date of grant or earlier, under certain
circumstances.

In 1997, each of Messrs. James H. Michael, Efron and Braun were granted an
option to purchase 10,000 shares of Common Stock. The exercise price of such
options is $7.375 per share. The grants are contingent upon shareholder
approval of a proposed amendment to the Enstar 1996 stock incentive plan
(the "Stock Incentive plan)" to be voted on at the June 18, 1998 Annual
Meeting of the Company.

COMMITTEES OF THE BOARD OF ENSTAR

AUDIT COMMITTEE. The Audit Committee, consisting of Mr. Efron and Mr.
Braun, did not meet in 1997. The Audit Committee will review and make
recommendations and reports to the Board with respect to (I) the independent
auditors, (ii) the quality and effectiveness of internal controls, (iii)
engagement or discharge of the independent auditors, (iv) professional services
provided by the independent auditors, and (v) the review and approval of major
changes in the Company's accounting principals and practices.

COMPENSATION COMMITTEE. The Compensation Committee, consisting of Mr. Efron
and Mr. Braun met once in 1997. The Compensation Committee considers and
recommends to the Board salaries, bonuses and other remuneration for the
Company's executive officers. This committee also administers the Stock
Incentive Plan.

-31-
<PAGE>

EXECUTIVE COMPENSATION

SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION

The following table provides certain summary information concerning
compensation paid or accrued by the Company to or on behalf of the President and
Chief Executive Officer and the four other most highly compensated executive
officers (the "Named Executive Officers") as of the year ended December 31,
1997. Information is also provided for the year ended December 31, 1996, the
first year in which the Company operated.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
ANNUAL COMPENSATION* LONG-TERM
-------------------------------- COMPENSATION
SALARY BONUS STOCK ALL OTHER
NAME AND PRINCIPAL POSITION YEAR ($) ($) OPTIONS (#)(1) COMPENSATION
--------------------------- --------- ---------------- -------------- -------------- -----------------
<S> <C> <C> <C> <C> <C>
Jeffrey J. Michael . . . . . . . . . . . . 1997 $ 187,654 $ 0 125,000(2) $ 7,146(3)
President and Chief Executive Officer 1996(4) -- -- 28,500 --

Peter E. Flynn . . . . . . . . . . . . . . 1997 157,939 0 90,000 6,889(5)
Executive Vice President 1996(6) -- -- 23,500 --

C.S. Mondelli. . . . . . . . . . . . . . . 1997 138,058 16,250 0 4,087(7)
President and Chief Executive Officer 1996 120,000 24,000 70,000(8) 2,769
of Transition

Ronald D. Newman . . . . . . . . . . . . . 1997 124,500 13,347 20,000(9) 1,718(7)
President of Enstar Networking 1996 85,000 10,150 25,000(9) 476

Thomas S. Wargolet . . . . . . . . . . . . 1997 90,000 0 0 4,404(7)
Chief Financial Officer and Secretary 1996 87,231 26,100 49,250(10) 2,890
</TABLE>

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

* No years prior to fiscal 1996 are reported as the Company was a wholly
owned subsidiary of NSU, a corporation subject to the reporting
requirements of the Securities Exchange Act of 1934, as amended.

(1) None of the Named Executive Officers held or received any awards of
restricted shares.

(2) 17,100 of such options are contingent grants subject to approval of an
amendment to the Stock Incentive Plan by shareholders of the Company.

(3) Consists of $4,750 contributed to the Company's 401(k) plan for the
benefit of Mr. Michael and $2,396 of which represents life and disability
insurance premiums paid by ENStar for the benefit of Mr. Michael.

(4) During 1996, Mr. Michael did not receive any cash compensation from the
Company. Mr. Michael did receive an annual salary of $235,000 from NSU,
and $7,196 in other compensation, $4,750 of which represents amounts
contributed by NSU for the benefit of Mr. Michael pursuant to NSU's
401(k) plan, and $2,446 of which represents life and disability insurance
premiums paid by NSU for the benefit of Mr. Michael.

(5) Consists of $4,750 contributed to the Company's 401(k) plan for the
benefit of Mr. Flynn and $2,139 of which represents life and disability
insurance premiums paid by ENStar for the benefit of Mr. Flynn.

(6) During 1996, Mr. Flynn did not receive any cash compensation from the
Company. Mr. Flynn did receive an annual salary of $161,330 and a bonus
of $100,000 from NSU, and $6,889 in other compensation, $4,750 of which
represents amounts contributed by NSU for the benefit of Mr. Flynn
pursuant to NSU's 401(k) plan, and $2,139 of which represents life and
disability insurance premiums paid by NSU for the benefit of Mr. Flynn.

(7) Amount contributed to the Company's 401(k) plan for the benefit of
employee.

(8) Represents options to purchase shares of Transition common stock.

(9) Represents options to purchase shares of Americable common stock, which
in 1998 were replaced by options to purchase shares of Enstar Networking
common stock.

(10) Includes options to purchase 35,000 shares of Americable common stock,
which in 1998 were replaced by options to purchase shares of Enstar
Networking common stock.

-32-
<PAGE>

STOCK OPTIONS

OPTION GRANTS DURING 1997

The following table sets forth individual grants of stock options made to
the Named Executive Officers during the year ended December 31, 1997:

<TABLE>
<CAPTION>
NUMBER OF PERCENT OF POTENTIAL REALIZABLE
SECURITIES TOTAL OPTIONS EXERCISE VALUE AT ASSUMED
UNDERLYING GRANTED TO PRICE OR ANNUAL RATES OR STOCK
OPTIONS EMPLOYEES BASE PRICE APPRECIATION
GRANTED IN FISCAL PRICE/SH. EXPIRATION FOR OPTION TERM(2)
NAME (#)(1) YEAR(%) ($) DATE 5%($) 10%($)
- ---- ----------------- ------------ ---------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Jeffrey J. Michael . . . 125,000(3) 46.3%(4) $ 7.375 12/29/2007 $ 579,762 $ 1,469,231
Peter E. Flynn . . . . . 90,000 33.3(4) 7.375 12/29/2007 417,429 1,057,847
C.S. Mondelli. . . . . . -- -- -- -- -- --
Ronald D. Newman . . . . 20,000(5) 44.4(6) 1.150 4/1/2006 14,465 36,656
Thomas S. Wargolet . . . -- -- -- -- -- --
</TABLE>
- ------------------------

(1) Each option represents the right to purchase one share of common stock.
The options shown in this table are all non-qualified stock options.
The options to purchase shares of Common Stock of ENStar granted to
Messrs. Michael and Flynn become exercisable with respect to 25% of
such shares each year over a period of four years from the date of
grant and have a term of ten years. To the extent not already
exercisable, the options generally become exercisable in the event of a
merger in which ENStar or Americable, as the case may be, is not the
surviving corporation, a transfer of all the stock of ENStar or
Americable, as applicable, a sale of substantially all the assets, or a
dissolution or liquidation, of ENStar or Americable, as applicable.

(2) The compounding assumes a ten year exercise period for all option grants.
The 5% and 10% assumed annual rates of compounded stock price
appreciation are mandated by rules of the Securities and Exchange
Commission and do not represent ENStar's estimate or projection of future
common stock prices. These amounts represent certain assumed rates of
appreciation only. Actual gains, if any, on stock option exercises are
dependent on the future performance of the common stock of ENStar,
Americable and Transition, as applicable, and overall stock market
conditions. The amounts represented in the table may not necessarily be
achieved.

(3) 17,100 of such options are contingent grants subject to approval of an
amendment to the Stock Incentive Plan by shareholders of the Company.

(4) Percentage of options to purchase ENStar Common Stock granted in 1997.

(5) Represents the right to purchase shares of common stock of Americable.
The options granted to Mr. Newman are options to purchase shares of
Americable and are exercisable with respect to 20% of such shares on
the date of grant and on each anniversary of the date of grant during
the four year period thereafter, and have a term of ten years. In
January 1998, Mr. Newman's options to purchase Americable common stock
were canceled and replaced with options to purchase Enstar Networking
common stock.

(6) Percentage of options to purchase Americable common stock granted in
1997.

-33-
<PAGE>

AGGREGATED OPTION EXERCISES IN 1997 AND YEAR END OPTION VALUES

The following table provides information concerning stock option exercises
and the value of unexercised options at December 31, 1997 for the Named
Executive Officers:

<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
ACQUIRED VALUE OPTIONS AT YEAR END(#) AT YEAR END($)
ON EXERCISE REALIZED ---------------------------- ----------------------------
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- -------- ------------ -------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Jeffrey J. Michael . . . . . . 0 $ 0 7,125 146,375 $ 0 $ 46,875
Peter E. Flynn . . . . . . . . 0 0 5,875 107,625 0 33,750
C.S. Mondelli. . . . . . . . . 0 0 28,000(1) 42,000(1) 0 0
Ronald D. Newman . . . . . . . 0 0 14,000(2) 31,000(2) 0 0
Thomas S. Wargolet . . . . . . 0 0 3,562 10,688 0 0
0 0 14,000(2) 21,000(2) 0 0
</TABLE>

- ----------------
(1) Represents the right to purchase shares of common stock of Transition.

(2) Represents the right to purchase shares of common stock of Americable.
In January 1998, such options were canceled and replaced with options to
purchase common stock of Enstar Networking.

Americable, Transition and Enstar Networking maintain separate stock
option plans. The exercise price of the options granted pursuant to the plans
of the operating subsidiaries are determined by the Board of Directors of the
respective operating subsidiaries, based on the then current fair value of the
common stock. Pursuant to the terms of the applicable option agreements under
the plans, the shares of common stock that may be purchased pursuant to the
options are subject to restrictions on transfer and certain repurchase rights by
each of the respective issuers and by ENStar, based on a valuation formula. The
option agreements also include certain covenants with respect to nondisclosure
of confidential information and non-competition.

EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT ARRANGEMENTS

Mr. Wargolet is a party to an employment contract with Enstar
Networking which provides that Mr. Wargolet is entitled to receive his base
salary for six months subsequent to the termination of his employment by
Enstar Networking without cause.

RELATED PARTY TRANSACTION

On April 2, 1996, Mr. Efron, a director of the Company, and NSU entered
into a promissory note for $169,200, plus interest at the "reference rate" of
interest announced from time to time by First Bank National Association,
Minneapolis,

-34-

<PAGE>

Minnesota, to be repaid in four equal annual installments. Mr. Efron used
such funds to exercise stock options to purchase shares of common stock of
NSU, as permitted under the terms of the applicable NSU stock option plan.
Mr. Efron's note to NSU was assigned to the Company in connection with the
spin-off of ENStar by NSU. The largest amount outstanding under the note was
$183,915.76 on April 22, 1997, the date Mr. Efron repaid the promissory note
in full.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT

The following table sets forth certain information concerning beneficial
ownership of the Common Stock of the Company as of April 17, 1998 with respect
to (i) all persons known by the Company to be the beneficial owners of more than
5% of the outstanding Common Stock of the Company, (ii) each director of the
Company, (iii) each Named Executive Officer, and (iv) all directors and
executive officers as a group.

<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF PERCENT
BENEFICIAL OF
NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP(1) CLASS
- ------------------------------------ ------------ -------
<S> <C> <C>
James H. Michael . . . . . . . . . . . . . . . . . . . 1,030,965 (2) 31.5%
Jeffrey J. Michael . . . . . . . . . . . . . . . . . . 885,698 (3) 27.0%
Miles E. Efron . . . . . . . . . . . . . . . . . . . . 148,000 (4) 4.5%
Peter E. Flynn . . . . . . . . . . . . . . . . . . . . 11,750 (5) *
Thomas S. Wargolet . . . . . . . . . . . . . . . . . . 7,925 (6) *
Richard J. Braun . . . . . . . . . . . . . . . . . . . 4,000 (7) *
C.S. Mondelli. . . . . . . . . . . . . . . . . . . . . 0 *
Ronald D. Newman . . . . . . . . . . . . . . . . . . . 0 *
Heartland Advisors, Inc. . . . . . . . . . . . . . . . 206,833 (8) 6.3%
790 North Milwaukee Street
Milwaukee, Wisconsin 53202
All officers and directors as a group (7 persons). . . 2,088,338 (9) 63.1%
</TABLE>
- ------------------
* Less than one percent.

(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission ("SEC"), and includes generally
voting power and/or investment power with respect to securities.
Shares of Common Stock subject to options or warrants currently
exercisable within 60 days of the date hereof ("Currently Exercisable
Options") are deemed outstanding for computing the percentage
beneficially owned by the person holding such

-35-

<PAGE>

options, but are not deemed outstanding for computing the percentage
beneficially owned by any other person.

(2) Includes 962,164 shares of Common Stock held by 4J2R1C Limited
Partnership, as to which Mr. James H. Michael, as managing general
partner, exercises sole voting and dispositive power. Mr. James H.
Michael has disclaimed any beneficial ownership of the shares
beneficially owned by Mr. Jeffrey J. Michael. Also includes 4,000 shares
of Common Stock issuable pursuant to Currently Exercisable Options.

(3) Includes 865,666 shares of Common Stock held by 3J2R Limited Partnership,
as to which Mr. Jeffrey J. Michael, as general partner, exercises sole
voting and dispositive power. Mr. Jeffrey J. Michael has disclaimed any
beneficial ownership of the shares beneficially owned by Mr. James H.
Michael. Includes 14,250 shares of Common Stock issuable pursuant to
Currently Exercisable Options.

(4) Includes 4,000 shares of Common Stock issuable pursuant to Currently
Exercisable Options.

(5) Consists of 11,750 shares of Common Stock issuable pursuant to Currently
Exercisable Options.

(6) Includes 7,125 shares of Common Stock issuable pursuant to Currently
Exercisable Options.

(7) Consists of 4,000 shares of Common Stock issuable pursuant to Currently
Exercisable Options.

(8) Based on information in a Schedule 13G Report showing information as of
January 27, 1998, and indicating that Heartland Advisors, Inc. has sole
voting and sole dispositive power over all such shares.

(9) Shares shown as beneficially owned include 45,125 shares not outstanding,
but which may be acquired pursuant to Currently Exercisable Options.

-36-

<PAGE>

DESCRIPTION OF DEBENTURES

GENERAL

The Debentures will be issued under an Indenture, as supplemented (the
"Indenture"), between the Company and National City Bank of Minneapolis, as
Trustee (the "Trustee"). The Indenture has been filed as an exhibit to the
Registration Statement of which this Prospectus is a part, and a copy is
available for inspection at the principal executive offices of the Trustee. The
following discussion summarizes certain provisions of the Indenture and is
subject to, and is qualified in its entirety by reference to all of the
provisions of the Indenture, including the definitions therein of certain terms.
Whenever particular provisions of or terms defined in the Indenture are referred
to in this Prospectus, such provisions or defined terms are incorporated herein
by reference. Section and article references appearing below are to the
Indenture.

The Debentures are unsecured obligations of the Company and will rank on a
parity with other outstanding unsecured obligations of the Company with the
exception of Senior Indebtedness. See "-- Provisions Relating to Debentures --
Subordination." There is no sinking fund or similar provision for payment of the
Debentures at maturity. Maturing Debentures will be paid from general funds of
the Company or from the sale of new Debentures.

The interest rates payable on sold Debentures will be subject to change by
the Company from time to time based on market conditions and the Company's
financial requirements, but no such change will affect the interest rate on any
Debentures purchased prior to the effective date of such change. (Section
2.02(b)). The interest rate applicable to the Debentures will be the rate set
forth in this Prospectus or in a post-effective amendment to this Prospectus, if
any, in effect as of the date of the issuance of such Debenture. (Section
2.02(b)). The Debentures will mature on the first day of the month immediately
following the second, fifth and tenth anniversary of their respective dates of
issue, unless previously redeemed at the option of the Company. Interest payable
on the Debentures will be calculated based on a 365 day year.

The Debentures will be issued only in registered form, without coupons, in
any amount of $1,000 or more. (Section 2.02(c)).

PROVISIONS RELATING TO DEBENTURES

SUBORDINATION. Payment of principal and interest on the Debentures is
subordinated and subject to the prior payment in full of all Senior
Indebtedness. (Section 10.01). Upon (i) the maturity of such Senior
Indebtedness, including by lapse of time, acceleration or otherwise, (ii) the
happening of an event of default with respect to any Senior Indebtedness
permitting the holders thereof to accelerate the maturity thereof, or (iii) any
distribution of the assets of the Company upon the dissolution, winding up,
liquidation or reorganization of the Company, the holders of such Senior
Indebtedness will be entitled to receive payment in full before the holders of
the Debentures are entitled to receive any payment. (Article 10).

Under the Indenture, "Senior Indebtedness" means all Indebtedness (other
than the Debentures), whether outstanding on the date of execution of the
Indenture or thereafter created, incurred, assumed, or guaranteed by the Company
(and all renewals, extensions or refunding thereof), unless the instrument under
which such Indebtedness is created, incurred, assumed or guaranteed expressly
provides that such Indebtedness is not senior or superior in right of payment to
the Debentures. Senior Indebtedness under the Indenture also includes all NSU
Assumed Indebtedness. (Section 10.02). "Indebtedness" means any indebtedness,
contingent or otherwise, in respect of borrowed money, or evidence by bonds,
notes, debentures or similar instruments or letters of credit, or representing
the balance deferred and unpaid of the purchase price of any property or
interest therein, except any such balance that constitutes a trade payable.
(Section 10.02).

The Indenture does not limit the amount of additional indebtedness, including
Senior Indebtedness, which the Company or any subsidiary can create, incur,
assume or guarantee. As a result of these subordination provisions, holders of
the Debentures may recover less ratably than holders of Senior Indebtedness of
the Company, in the event of insolvency. As of April 17, 1998, the Company had
no outstanding Senior Indebtedness. In addition, as of April 17, 1998, the
Company had approximately $17.7 million of outstanding subordinated debentures.

The Debentures to be sold pursuant to this offering rank in parity with
each other. The Company may sell, and is permitted pursuant to the Indenture to
sell, additional subordinated debentures ranking in parity with the Debentures
being offered hereby.

INTEREST. Interest on each Debenture will accrue from the date of issuance
and will be payable, at the election of the initial purchaser, quarterly, at
maturity, or if the Debenture is in a denomination of $5,000 or more, monthly.
If interest is paid at maturity only, it will be compounded quarterly.

-37-
<PAGE>

The election by the purchaser at the time of the purchase for payment of
interest at maturity may be changed only once to provide for the payment either
quarterly or monthly. Accrued and unpaid interest as of the effective date of
the change will be added to the principal amount of the Debenture and simple
interest will be paid thereafter on the new principal amount. To change the
payment option a holder of a Debenture must: (a) furnish the Company with a
written notice of such election; (b) forward the actual certificate evidencing
the Debenture to the Company for notation of current value and change in
interest payment; and (c) provide such additional documentation and other
materials as the Company deems necessary.

INTEREST ACCRUAL DATE. Interest on the Debentures accrues from the date of
issuance, which is deemed to be the date the Company receives a properly
executed Subscription Agreement and appropriate funds, provided such are
received prior to 3:00 p.m. on a business day. Otherwise, if the Company
receives such funds on a nonbusiness day or after 3:00 p.m. on a business day,
then the date of issuance will be deemed to be the next business day. For this
purpose, the Company's business days will be deemed to be Monday through Friday,
except for Minnesota legal holidays. (Sections 1.01 and 2.02(b)).

TAXES. The following discussion is based on provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), applicable regulations
thereunder, judicial authority and current administrative ruling, all of which
may be retroactively subject to change. Each prospective purchaser of Debentures
is advised to consult his or her own tax advisor. Interest on the Debentures is
taxable as it accrues, including interest on Debentures which is payable only at
maturity. As a consequence, a holder of a Debenture who elects payment of
interest at maturity is required to recognize the interest income on such
Debenture as it accrues although payment of such interest is deferred until
maturity. Under the Code, the Company is required to report the interest earned
on Debentures with respect to each holder to the Internal Revenue Service. No
portion of interest will be withheld for holders providing the Company with a
taxpayer identification number on Forms W-8 or W-9, except on accounts held by
foreign business entities. With respect to those investors who do not provide
the Company with a taxpayer identification number on Forms W-8 or W-9, the
Company will withhold 31% of any interest paid. It is the Company's policy that
no sale will be made to anyone refusing to provide a taxpayer identification
number on Forms W-8 or W-9.

ADDITIONAL INTEREST. In addition to the interest rates payable as set forth
above, the Company may make such additional payments of interest, premiums or
other benefits on such of the Debentures, in such amounts, in such form, on such
terms and at such times as shall be determined from time to time by the Company
("Additional Interest"). (Section 2.02(b)). Such Additional Interest payments
may be modified or discontinued at any time. (Section 2.02(b)). For example,
such Additional Interest payments may be limited to new investors, or to current
investors increasing or renewing their investments in the Company's Debentures.
Also, such Additional Interest payments may be limited to current or new
investors residing in a particular geographic area.

REDEMPTION AT THE OPTION OF THE COMPANY. The Company may, at its option,
redeem any or all of the Debentures on at least 30 days notice to each holder of
Debentures to be redeemed at his or her registered address at a price of 100% of
the principal amount of the Debentures, plus accrued interest on a daily basis
to the redemption date. (Section 3.04). The Company may select Debentures for
redemption by interest rate or maturity. (Section 3.03). In the event of
redemption of less than all of a series or class of Debentures selected for
redemption by the Company, the Debentures will be chosen for redemption by the
Trustee as provided in the Indenture, generally pro rata or by lot. (Section
3.03). On and after the redemption date, interest ceases to accrue on Debentures
or portions of them called for redemption. (Article 3).

REDEMPTION BY THE HOLDER UPON DEATH; OFFERS BY THE COMPANY TO REPURCHASE
DEBENTURES. A maximum principal amount of $25,000 in one or more Debentures may
be redeemed at the election of the estate of the original owner (if such person
was still the holder) following such person's death, as established to the
satisfaction of the Company. (Section 3.08(a)). The redemption price, in the
event of such a death, will be the principal amount of the Debenture, plus
interest accrued and not previously paid, to the date of redemption. (Section
3.08(a)). If two or more persons are joint record owners of a Debenture, the
election to redeem will not apply until all record owners are deceased, except
that, if the joint owners are husband and wife, the election may be made after
the death of either spouse. (Section 3.08(d)). Except as described above,
Debenture holders have no right to require redemption of amounts under the
Debenture. Any offer to repurchase Debentures made by the Company at the
holders' option will be made in compliance with any applicable tender offer
rules under the Securities Exchange Act of 1934, as amended, including Rule
14e-1 thereunder. (Article 3).

MODIFICATION OF INDENTURE. The Indenture may be modified by the Company and
the Trustee at any time or times with the consent of the holders of not less
than a majority in principal amount of the Debentures that are then outstanding,
but no modification of the Indenture may be made which will affect the terms of
payment of, the principal of, or any interest on any Debenture, without the
consent of the holder thereof, or reduce the percentage of Debenture holders
whose consent to modification is required. (Section 9.02). Without action by the
Debenture holders, the Company and the Trustee may amend the Indenture or enter
into supplemental indentures allowing for uncertificated Debentures, clarifying
any ambiguity or correcting any defect or inconsistency in the Indenture, making
any change to the Indenture that does not adversely affect the legal rights of
the Debenture holders, or increasing the aggregate principal amount of
Debentures to be issued under the Indenture. (Article 9).

-38-
<PAGE>

PLACE, METHOD AND TIME OF PAYMENT. Principal and interest on the Debentures
will be payable at the principal executive office of the Company, as it may be
established from time to time, or at such other place as the Company may
designate for that purpose; provided, however, that payments may be made at the
option of the Company by check or draft mailed to the person entitled thereto at
his or her address appearing in the register which the Company maintains for
that purpose. (Section 2.06). Any payment of principal or interest which shall
be due on a non-business day will be payable by the Company on the next business
day immediately following such non-business day. (Section 11.07).

EVENTS OF DEFAULT. An Event of Default is defined in the Indenture as being
a default in payment of principal on the Debentures which has not been cured; a
default for 30 days in payment of any installment of interest on the Debentures;
acceleration of maturity of any Senior Indebtedness in an amount exceeding
$500,000 under the terms of the instrument under which such Senior Indebtedness
is or may be outstanding, if such acceleration is not annulled within 30 days
after written notice; or certain events of bankruptcy, insolvency or
reorganization or default in the performance or breach of any covenant or
warranty of the Company in the Indenture and continuance of such default in
performance or breach for a period of 60 days after notice of such default has
been received by the Company from the Trustee or from the holders of at least
25% in principal amount of the outstanding Debentures. (Section 6.01). The
Company is required to file annually with the Trustee an Officer's Certificate
as to the absence of certain defaults under the terms of the Indenture. (Section
4.03). The Indenture provides that the holders of a majority of the aggregate
principal amount of the Debentures at the time outstanding may, on behalf of all
holders, waive any past default or Event of Default except in payment of
principal or interest on the Debentures. (Section 6.04).

Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default shall occur and be continuing, the Trustee
is under no obligation to exercise any of its rights or powers under the
Indenture at the request, order or direction of any of the Debenture holders,
unless such Debenture holders shall have offered to the Trustee reasonable
indemnity. (Section 6.06(3)). Subject to such provisions for the indemnification
of the Trustee, the holders of a majority in principal amount of the Debentures
at the time outstanding have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee, or exercising
any power conferred on the Trustee. (Section 6.05). The Indenture contains
certain limitations on the right of an individual Debenture holder to institute
legal proceedings in the event of the Company's default. (Section 6.06).

SATISFACTION AND DISCHARGE OF INDENTURE. The Indenture may be discharged
upon the payment of all Debentures outstanding thereunder or upon deposit in
trust of funds sufficient therefor, plus compliance with certain formal
procedures. (Article 8).

REPORTS. The Company plans to publish annual reports containing audited
financial statements and quarterly reports containing unaudited financial
information for the first three quarters of each fiscal year. Copies of such
reports will be sent to any Debenture holder upon written request.

SERVICE CHARGES. The Company reserves the right to assess service charges
for issuing Debentures to replace lost or stolen Debentures, changing the
registration of a Debenture when such change is occasioned by a change in name
of the holder, issuing a replacement interest payment check, or a transferring
(whether by operation of law or otherwise) of the Debenture by the holder to
another holder. (Sections 2.05, 2.07 and 2.08).

Any holder who requests the replacement of any interest payment check 10
days or less from issue date accepts any bank charges, including stop payment
order charges. The charges amount will be subtracted from the replacement
interest payment check.

TRANSFER AND EXCHANGE. A holder may transfer or exchange Debentures in
accordance with the Indenture. The Company, as the registrar under the
Indenture, may require a holder, among other things, to furnish appropriate
endorsements and transfer documents, and to pay any taxes and fees required by
law or permitted by the Indenture. The Company is not required to transfer or
exchange any Debentures selected for redemption. (Section 2.07). Also, the
Company is not required to transfer or exchange any Debenture for a period of
fifteen business days before the maturity of such Debentures. (Section 2.07).

CONCERNING THE TRUSTEE. The Indenture contains certain limitations on the
right of the Trustee, should it become a creditor of the Company, to obtain
payment of claims in certain cases, or to realize on certain property with
respect to any such claim as security or otherwise. The Trustee will be
permitted to engage in other transactions; however, if it acquires any
conflicting interest (as defined) and if any of the Indenture securities are in
default it must eliminate such conflict or resign.

The holders of a majority in principal amount of the then outstanding
Debentures issued under the Indenture will have the right to direct the time,
method and place of conducting any proceeding for exercising any remedy
available to the Trustee with respect to the Debentures. (Section 6.05). The
Indenture provides that in case an Event of Default shall occur, and is not
cured, the

-39-
<PAGE>

Trustee will be required, in the exercise of its power, to use the degree of
care of a prudent person in the conduct of his or her own affairs. (Section
7.01(a)). Subject to such provisions, the Trustee will be under no obligation to
exercise any of its rights or powers under the Indenture at the request of any
of the holders of the Debentures issued thereunder, unless they shall have
offered to the Trustee security and indemnity satisfactory to it. (Section
7.01(e)).

VALIDITY OF DEBENTURES

Certain matters with respect to the validity of the Debentures offered
hereby will be passed upon for the Company by Dorsey & Whitney LLP, Minneapolis,
Minnesota.

EXPERTS

The consolidated financial statements of ENStar Inc. as of December 31,
1997 and 1996 and for each of the three years in the period ended December 31,
1997 have been audited by Grant Thornton LLP, independent auditors, as set forth
in their reports included herein, and are included in reliance upon such reports
given upon the authority of said firm as experts in accounting and auditing.

The consolidated financial statements and schedule of CorVel Corporation as
of March 31, 1997, and 1996 and for each of the three years in the period ended
March 31, 1997 have been audited by Ernst & Young LLP and are included in
reliance on their report included elsewhere herein given on their authority as
experts in auditing and accounting.

-40-
<PAGE>

ENSTAR INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

FINANCIAL STATEMENTS OF ENSTAR PAGE
- ------------------------------ ------
Consolidated Statements of Operations for the three years ended
December 31, 1997, 1996 and 1995 .................................... F-2

Consolidated Balance Sheets as of December 31, 1997 and 1996 .......... F-3

Consolidated Statements of Shareholders' Equity for the three years
ended December 31, 1997, 1996 and 1995 ............................. F-4

Consolidated Statements of Cash Flows for the three years ended
December 31, 1997, 1996 and 1995 ................................... F-5

Notes to Consolidated Financial Statements ............................ F-6

Report of Independent Certified Public Accountants .................... F-14

Schedule II -- Valuation and Qualifying Accounts ...................... F-15

FINANCIAL STATEMENTS OF CORVEL
- ------------------------------

Report of Independent Auditors ........................................ S-1

Consolidated Statements of Income for the three years ended
March 31, 1995, 1996 and 1997 ....................................... S-2

Consolidated Balance Sheets as of March 31, 1996 and 1997 ............. S-3

Consolidated Statements of Stockholders' Equity for the three years
ended March 31, 1995, 1996 and 1997 ................................. S-4

Consolidated Statements of Cash Flows for the three years ended
March 31, 1995, 1996 and 1997 ....................................... S-5

Notes to Consolidated Financial Statements ............................ S-6

Schedule II -- Valuation and Qualifying Accounts ...................... S-12

Condensed Consolidated Statements of Income for the nine months
ended December 31, 1996 and 1997 .................................... S-13

Condensed Consolidated Balance Sheets as of March 31, 1997 and as of
December 31, 1997 ................................................... S-14

Condensed Consolidated Statements of Cash Flows for the nine months
ended December 31, 1996 and 1997 ................................... S-15

Notes to Condensed Consolidated Financial Statements .................. S-16

F-1
<PAGE>

ENSTAR INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1997 1996 1995
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 54,352 $ 64,123 $ 54,891
Operating and product costs. . . . . . . . . . . . . . . . . . . 39,122 47,286 39,525
-------- -------- --------
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . 15,230 16,837 15,366
Selling, general and administrative expenses . . . . . . . . . . 20,209 16,890 14,333
-------- -------- --------
Operating income (loss). . . . . . . . . . . . . . . . . . . . . (4,979) (53) 1,033
Interest expense, net. . . . . . . . . . . . . . . . . . . . . . (809) (204) (247)
-------- -------- --------
Income (loss) before taxes and equity in earnings of
unconsolidated subsidiary. . . . . . . . . . . . . . . . . . . (5,788) (257) 786
Income tax provision (benefit) . . . . . . . . . . . . . . . . . (2,178) (25) 405
-------- -------- --------
Income (loss) before equity in earnings of unconsolidated
subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . (3,610) (232) 381
Equity in earnings of unconsolidated subsidiary. . . . . . . . . 1,349 1,304 1,191
-------- -------- --------
Net income (loss). . . . . . . . . . . . . . . . . . . . . . . . $ (2,261) $ 1,072 $ 1,572
-------- -------- --------
-------- -------- --------

Basic and diluted net income (loss) per share. . . . . . . . . . $ (0.69) $ 0.32 $ 0.49
-------- -------- --------
-------- -------- --------

Weighted average shares outstanding. . . . . . . . . . . . . . . 3,289 3,309 3,217
-------- -------- --------
-------- -------- --------
</TABLE>

The accompanying notes are an integral part of these consolidated statements.

F-2
<PAGE>

ENSTAR INC.
CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1996
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . $12,609 $ 824
Accounts receivable, net of allowance for doubtful accounts ($414 in
1997 and $440 in 1996). . . . . . . . . . . . . . . . . . . . . . . . 7,086 8,785
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,145 5,706
Prepaid expenses and other . . . . . . . . . . . . . . . . . . . . . . . 316 481
------- -------
Total current assets. . . . . . . . . . . . . . . . . . . . . . . . . 25,156 15,796
Property and equipment, net. . . . . . . . . . . . . . . . . . . . . . . . 2,164 1,742
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,642 4,801
Investment in unconsolidated subsidiary. . . . . . . . . . . . . . . . . . 11,170 13,519
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 183 157
------- -------
$43,315 $36,015
------- -------
------- -------

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Notes payable to bank. . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,680 $ 1,310
Current maturities of long-term debt . . . . . . . . . . . . . . . . . . 165 28
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,200 4,101
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,165 4,830
------- -------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . 12,210 10,269
Long-term debt, less current maturities. . . . . . . . . . . . . . . . . . 16,168 1,150
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . -- 3,649
Commitments and contingencies. . . . . . . . . . . . . . . . . . . . . . . -- --
Shareholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,937 20,947
------- -------
$43,315 $36,015
------- -------
------- -------
</TABLE>

The accompanying notes are an integral part of these consolidated statements.

F-3
<PAGE>

ENSTAR INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
COMMON STOCK
-------------------------
ADDITIONAL OPERATING TOTAL
SHARES PAID-IN RETAINED UNIT SHAREHOLDERS'
ISSUED AMOUNT CAPITAL EARNINGS EQUITY EQUITY
---------- -------- --------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995 . . . . . -- $ -- $ -- $ -- $18,176 $18,176
Net income . . . . . . . . . . . . -- -- -- -- 1,572 1,572
Effect of equity transactions of
unconsolidated subsidiary . . . -- -- -- -- 42 42
Constructive dividend. . . . . . . -- -- -- -- (96) (96)
---------- ---- ------- ------- ------- -------
Balance at December 31, 1995 . . . . -- -- -- -- 19,694 19,694
Net income . . . . . . . . . . . . -- -- -- -- 868 868
Effect of equity transactions of
unconsolidated subsidiary . . . -- -- -- -- (45) (45)
Constructive dividend. . . . . . . -- -- -- -- (309) (309)
---------- ---- ------- ------- ------- -------
Balance at November 6, 1996. . . . . -- -- -- -- 20,208 20,208
Contribution of common stock
of Americable, Transition and
CorVel to ENStar Inc. by North
Star Universal, Inc. (NSU). . . -- -- 20,208 -- (20,208) --
Additional capital invested. . . . -- -- 660 -- -- 660
Net income from November 7, 1996
through December 31, 1996 . . . -- -- -- 204 -- 204
Effect of equity transactions of
unconsolidated subsidiary . . . -- -- (125) -- -- (125)
Issuance of shares of ENStar
common stock to shareholders
in February 1997. . . . . . . . 3,304,279 33 (33) -- -- --
---------- ---- ------- ------- ------- -------
Balance at December 31, 1996 . . . . 3,304,279 33 20,710 204 -- 20,947
---------- ---- ------- ------- ------- -------
Net loss . . . . . . . . . . . . . -- -- -- (2,261) -- (2,261)
Effect of equity transactions of
unconsolidated subsidiary. . . . -- -- (1,434) -- -- (1,434)
Constructive dividend to NSU . . . -- -- (2,082) -- -- (2,082)
Purchase of common stock . . . . . (37,290) -- (233) -- -- (233)
---------- ---- ------- ------- ------- -------

Balance at December 31, 1997 . . . . 3,266,989 $ 33 $16,961 $(2,057) $ -- $14,937
---------- ---- ------- ------- ------- -------
---------- ---- ------- ------- ------- -------
</TABLE>

The accompanying notes are an integral part of these consolidated statements.

F-4
<PAGE>

ENSTAR INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
--------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities
Net income (loss). . . . . . . . . . . . . . . . . . . . . . $(2,261) $ 1,072 $ 1,572
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Equity in earnings of unconsolidated subsidiary . . . . . . (1,349) (1,304) (1,191)
Depreciation and amortization . . . . . . . . . . . . . . . 1,145 940 837
Deferred income taxes . . . . . . . . . . . . . . . . . . . (2,187) (25) (465)
Changes in operating assets and liabilities
Accounts receivable . . . . . . . . . . . . . . . . . . . 1,699 (1) (1,268)
Inventories . . . . . . . . . . . . . . . . . . . . . . . 561 925 (548)
Accounts payable, accrued expenses and other. . . . . . . 599 (1,679) 2,202
------- ------- -------
Net cash provided by (used in) operating activities . . . . (1,793) (72) 1,139
------- ------- -------
Cash flows from investing activities
Capital expenditures. . . . . . . . . . . . . . . . . . . . (1,408) (1,070) (543)
Collections on notes receivable . . . . . . . . . . . . . . -- 258 1,096
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . (26) (226) --
------- ------- -------
Net cash provided by (used in) investing activities . . . . (1,434) (1,038) 553
------- ------- -------
Cash flows from financing activities
Proceeds from long-term debt. . . . . . . . . . . . . . . . 15,183 -- --
Payments on long-term debt. . . . . . . . . . . . . . . . . (28) -- --
Proceeds from notes payable . . . . . . . . . . . . . . . . 62,687 69,017 56,073
Payments on notes payable . . . . . . . . . . . . . . . . . (61,317) (68,712) (57,497)
Additional capital invested (constructive dividends). . . . (1,280) 1,383 (96)
Purchase of common stock. . . . . . . . . . . . . . . . . . (233) -- --
------- ------- -------
Net cash provided by (used in) financing activities . . . . 15,012 1,688 (1,520)
------- ------- -------
Net increase in cash and cash equivalents . . . . . . . . . 11,785 578 172
Cash and cash equivalents at beginning of year . . . . . . . . 824 246 74
------- ------- -------
Cash and cash equivalents at end of year . . . . . . . . . . . $12,609 $ 824 $ 246
------- ------- -------
------- ------- -------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest. . . . . . . . . . . . . . . . . . . . . . . . . . $ 986 $ 225 $ 247
Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 -- --
</TABLE>
See Note 5.

The accompanying notes are an integral part of these consolidated statements.

F-5
<PAGE>

ENSTAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 -- ORGANIZATION AND BUSINESS

ENStar Inc. ("ENStar" or the "Company") is a holding company principally
comprised of three operating companies, Americable, Inc. ("Americable"), Enstar
Networking Corporation ("Enstar Networking") and Transition Networks, Inc.
("Transition"), and an equity investment in CorVel Corporation ("CorVel").
ENStar was formerly an operating unit of North Star Universal, Inc. ("North
Star"). In November 1996, North Star contributed the operating unit's assets to
ENStar. On February 28, 1997, North Star, in connection with its merger with
Michael Foods, Inc. ("Michael Foods"), distributed its ownership interest in
ENStar to North Star's shareholders through a tax free dividend, thus causing
ENStar to become a publicly held company.

Americable is a distributor of premise wiring, connectivity products, and
low-end networking electronics and represents approximately 20% of the Company's
consolidated sales. Enstar Networking (formerly a division of Americable) is a
network integrator that provides services to design, build, maintain, and
protect corporate network infrastructures, and accounts for approximately 50% of
the Company's sales. Transition designs, manufactures and markets connectivity
devices and network applications, and accounts for approximately 30% of sales.
CorVel is a health care services company. At December 31, 1997 and 1996, the
Company owned a 25% and 26% ownership in CorVel. The Company's investment in
CorVel is accounted for as an unconsolidated subsidiary using the equity method
of accounting.

NOTE 2 -- SUMMARY OF ACCOUNTING POLICIES

PRINCIPALS OF CONSOLIDATION AND BASIS OF PRESENTATION The consolidated
financial statements include the accounts of the Company and its wholly-owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated. For the period prior to November 1996, financial statements are
those of the combined operating units described in note 1. Operating unit
equity was converted to contributed capital at the time North Star contributed
the capital stock of Americable, Transition, and CorVel to ENStar. There was no
change in the historical cost basis of the assets and liabilities of any of the
entities or investment contributed to ENStar. The consolidated, and formerly
combined, financial statements include an allocation of general and
administrative costs incurred by North Star in the management of the operating
companies. Management believes these allocations are reasonable and present the
operations of the Company as though it had operated on a stand-alone basis.
Previously, operating unit equity included the historical equity of each entity,
the net investment in CorVel and intercompany payables owed to North Star. The
net annual advances between the former operating unit and North Star were
considered additional capital invested from, or constructive dividend to, North
Star. Accordingly, the accompanying consolidated financial statements may not
necessarily be indicative of the results that would have been obtained if the
Company had been operated as a stand alone entity throughout all periods
presented.

CASH AND CASH EQUIVALENTS The Company considers its highly liquid temporary
investments with original maturities of three months or less to be cash
equivalents. The carrying value of cash and cash equivalents approximate fair
value because of the short-term maturity of these investments.

ACCOUNTS RECEIVABLE The Company grants credit to customers in the normal
course of business, but generally does not require collateral or any other
security to support amounts due. Management performs ongoing credit evaluations
of customers. The Company maintains an allowance for potential credit losses
which when realized, have been within management expectations.

INVENTORIES Inventories are stated at the lower of average cost (determined
on a first-in, first-out basis) or market. Inventories consist of the following
(in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996
-------- --------
<S> <C> <C>
Finished goods . . . . . . . . . . . . . . . $ 3,934 $ 3,285
Purchased part . . . . . . . . . . . . . . . 1,211 2,421
-------- --------
$ 5,145 $ 5,706
-------- --------
-------- --------
</TABLE>

F-6
<PAGE>

ENSTAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

PROPERTY AND EQUIPMENT Property and equipment are recorded at cost.
Depreciation and amortization for financial reporting purposes are provided on
the straight-line method over the estimated useful lives of the respective
assets which are generally three to five years. Accelerated methods are used for
income tax reporting. Property and equipment consist of the following (in
thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1996
------ ------
<S> <C> <C>
Leasehold improvements............................. $ 207 $ 183
Office and computer equipment...................... 4,857 3,490
------ ------
5,064 3,673
Less -- accumulated depreciation and amortization.. 2,900 1,931
------ ------
$2,164 $1,742
------ ------
------ ------
</TABLE>

GOODWILL Goodwill is amortized on a straight-line basis over a period of 40
years. Accumulated amortization was $1,701,000 and 1,542,000 at December 31,
1997 and 1996. The Company maintains separate financial records for each of its
acquired entities and evaluates its goodwill annually to determine potential
impairment by comparing the carrying value to the undiscounted future cash flows
of the related assets. The Company adjusts the value of a subsidiary's goodwill
if an impairment is identified.

ACCRUED EXPENSES Accrued expenses consist of the following (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1996
------ ------
<S> <C> <C>
Payroll and related benefits................. $ 867 $ 701
Insurance reserves........................... 544 968
Business disposition obligations............. 1,974 2,000
Other........................................ 1,780 1,161
------ ------
$5,165 $4,830
------ ------
------ ------
</TABLE>

The business disposition obligations primarily represent a lease commitment
of a business disposed by North Star. These obligations were part of the
liabilities assumed by ENStar under the indemnification agreement discussed in
Note 6.

REVENUE RECOGNITION The Company recognizes revenue from product sales at
the time product is shipped to a customer. Service revenue is recognized at the
time service is provided or ratably over the contractual service period.

RESEARCH AND DEVELOPMENT All research and development costs are charged to
expense as incurred. Research and development expenses were approximately $1.4
million in 1997, $1.5 million in 1996 and $1 million in 1995.

ADVERTISING The Company expenses advertising costs as incurred, except for
direct response advertising, which is capitalized and amortized over its
expected period of future benefit. Direct response advertising consists
primarily of catalog production costs which are amortized over the estimated
useful life of the publication, generally two years. Advertising costs charged
to expense were approximately $1.2 million in 1997, $1.1 million in 1996, and
$600,000 in 1995. Deferred advertising costs included within prepaid expenses
were $23,000 and $95,000 at December 31, 1997 and 1996.

NET INCOME (LOSS) PER SHARE On December 31, 1997, the Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 128 - "Earnings per
Share". All current and prior year earnings (loss) per share data have been
restated to conform to the provisions of SFAS128.

The Company's basic net income (loss) per share is computed by dividing net
income (loss) by the weighted average number of outstanding common shares. The
Company's diluted net income (loss) per share is computed by dividing net income
(loss) by the weighted average number of outstanding common shares and common
share equivalents relating to stock options, when dilutive. Options to purchase
78,600 shares of common stock with a weighted average exercise price of $8.97
were outstanding during 1997, but were excluded from the computation of common
share equivalents because they were antidilutive. There were no options
outstanding in 1995.

F-7
<PAGE>

ENSTAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

For 1996 and 1995, net income (loss) per share was computed based on the
weighted average number of shares of North Star common stock outstanding
(9,927,000 and 9,650,000). This weighted average number of shares was adjusted
to reflect the distribution of ENStar Inc. common stock to North Star
shareholders whereby one share of ENStar Inc. common stock was issued to each
holder of three shares of North Star common stock.

NEW ACCOUNTING PRONOUNCEMENTS SFAS No. 130 "Reporting Comprehensive Income"
and SFAS No. 131 "Disclosures about Segments of an Enterprise and Related
Information" are effective for fiscal years beginning after December 15, 1997.
SFAS 130 requires a company to display an amount representing comprehensive
income, as defined by the statement, as part of the Company's basic financial
statements. Comprehensive income will include items such as unrealized gains or
losses on certain investment securities and foreign currency items. The
adoption of SFAS 130 should not affect the Company's consolidated financial
statements.

SFAS 131 requires a company to disclose financial and other information, as
defined by the statement, about its business segments, their products and
services, geographic areas, major customers, revenues, profits, assets and other
information. The Company will include the required SFAS 131 business segment
disclosures in its 1998 annual report.

CAPITAL STOCK The Company has available for issue 100,000,000 shares,
consisting of 20,000,000 shares of preferred stock, par value of $.01 per share,
of which none have been issued or are outstanding at December 31, 1997. The
Company also has 80,000,000 shares of common stock, par value of $.01 per share,
of which 3,304,279 were issued in February 1997 in connection with the
distribution of ENStar common stock to NSU shareholders. These shares have been
reported in the Company's financial statements as if they were outstanding at
December 31, 1996. During 1997, the Company repurchased 37,290 shares of its
common stock using a modified "Dutch Auction" self tender offer. In March 1998,
the Company's Board of Directors authorized the repurchase of up to 350,000
shares of common stock.

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION As a result of equity
transactions in CorVel stock, the Company's investment in its unconsolidated
subsidiary decreased $2,349,000 and $337,000, while shareholders' equity
decreased $1,434,000 and $170,000, net of taxes, during the years ended
December 31, 1997 and 1996. For the year ended December 31, 1995, the Company's
investment in its unconsolidated subsidiary increased $70,000, while the
shareholders' equity increased by $42,000, net of taxes.

STOCK BASED COMPENSATION The Company utilizes the intrinsic value method of
accounting for its employee stock based compensation plans. Information related
to the fair value based method of accounting is contained in Note 8.

USE OF ESTIMATES In the preparation of the consolidated financial
statements, management is required to make estimates and assumptions that affect
the reported amounts of assets and liabilities and related revenues and
expenses. Actual results could differ from the estimates used by management.

RECLASSIFICATIONS Certain 1996 and 1995 amounts have been reclassified to
conform to the 1997 presentation.

NOTE 3 -- INVESTMENT IN UNCONSOLIDATED SUBSIDIARY

The Company's unconsolidated subsidiary consists of its investment in
CorVel, a health care services company. CorVel has a fiscal year end of March
31. The following is unaudited summarized balance sheet and income statement
information for CorVel as of, and for the twelve month period ended December 31,
1997 (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------
<S> <C>
Current assets . . . . . . . . . . . . . $ 36,764
Total assets . . . . . . . . . . . . . . 58,859
Current liabilities. . . . . . . . . . . 12,360
Noncurrent liabilities . . . . . . . . . 1,459
Revenues . . . . . . . . . . . . . . . . 135,958
Gross profit . . . . . . . . . . . . . . 25,359
Net income . . . . . . . . . . . . . . . 9,256
</TABLE>

F-8
<PAGE>

ENSTAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

At December 31, 1997, shareholders' equity includes approximately $4.2
million of unremitted earnings related to the Company's investment in CorVel.
At December 31, 1997, the fair value of the Company's investment in CorVel,
based on the closing market price, was approximately $38.7 million.

NOTE 4 -- NOTES PAYABLE AND LONG-TERM DEBT

Americable and Transition maintain revolving line of credit facilities to
provide borrowings up to $4 million each ($4 million and $2 million at December
31, 1996), due in June and May 1998, respectively. The Company believes it will
be able to renew or obtain new agreements at substantially the same terms and
conditions. Borrowings under these facilities are based on eligible accounts
receivable and inventory with interest at prime (8.5% at December 31, 1997). At
December 31, 1997, there were aggregate outstanding borrowings of $2,680,000,
and approximately $2 million of available borrowings under these credit
facilities. The notes contain certain restrictive covenants; the most
significant of which are: maintenance of specific tangible capital base levels,
capital expenditure limitations, and minimum leverage and interest coverage. In
September 1997, Americable obtained the necessary waivers from its bank to waive
its compliance with certain financial covenants and amend the terms of its
credit agreement. Under the terms of the amended credit agreement, ENStar is
required to make capital contributions to Americable to the extent Americable
(including Enstar Networking) incurs pretax losses in excess of specified
levels. At December 31, 1997, the companies were in compliance with or had
obtained waivers for all covenants under these agreements.

During 1997, ENStar provided an aggregate of $348,000 in cash to Americable
pursuant to the terms of the amended credit agreement. Additional cash
investments from ENStar are expected in 1998 to fund anticipated operating
losses and capital expenditures.

The carrying value of long-term debt, which approximates fair value,
consists of (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1996
------- -------
<S> <C> <C>
Subordinated debentures........................ $16,127 $ 945
Other.......................................... 206 233
------- -------
16,333 1,178
Less current maturities........................ 165 28
------- -------
$16,168 $ 1,150
------- -------
------- -------
</TABLE>

During 1997, the Company registered with the Securities and Exchange
Commission $25 million of debentures, of which $8,873,000 remained unissued at
December 31, 1997. Subordinated debentures are unsecured and due in varying
monthly installments beginning November 1998 through 2003 and had a weighted
average interest rate of 9.62% at December 31, 1997.

Aggregate minimum annual principal payments of long-term debt are as
follows (in thousands):

<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
---------------------------------
<S> <C>
1998............................. $ 165
1999............................. 4,778
2000............................. 89
2001............................. 95
2002............................. 5,768
Thereafter....................... 5,438
---------
$ 16,333
---------
---------
</TABLE>

F-9
<PAGE>

ENSTAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

NOTE 5 -- INCOME TAXES

The activity of the Company through February 1997 has been included in the
income tax return of North Star. For financial reporting purposes, the Company
has been allocated a provision for income taxes in an amount generally
equivalent to the provision that would have resulted had the Company filed
separate income tax returns. The provision for income taxes consists of the
following (in thousands):

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Current
Federal.................... $ -- $ 45 $ 740
State...................... -- 9 130
--------- --------- ---------
-- 54 870
--------- --------- ---------
Deferred:
Federal.................... (1,899) (69) (405)
State...................... (279) (10) (60)
--------- --------- ---------
(2,178) (79) (465)
--------- --------- ---------
$ (2,178) $ (25) $ 405
--------- --------- ---------
--------- --------- ---------
</TABLE>

The following is a reconciliation of income taxes at the federal statutory rate
to the effective rate:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Federal statutory rate....... (34.0)% (34.0)% 34.0%
State income taxes........... (4.8) (.3) 8.9
Goodwill amortization........ .9 21.1 7.0
Other........................ .3 3.5 1.6
-------- -------- --------
(37.6)% (9.7)% 51.5%
-------- -------- --------
-------- -------- --------
</TABLE>

The tax effects of the cumulative temporary differences resulting in the net
deferred tax liability are as follows (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1997 1996
---------- ----------
<S> <C> <C>
Investment in Corvel......... $ (4,187) $ (5,072)
Accrued expenses not 1,921 1,956
deductible until paid.......
Net operating loss 3,158 --
carryforwards...............
Other........................ (510) (533)
---------- ----------
382 (3,649)
Valuation allowance.......... (382) --
---------- ----------
$ -- $ (3,649)
---------- ----------
---------- ----------
</TABLE>

To the extent the Company's financial reporting basis in its investment in
its unconsolidated subsidiary exceeds its tax basis, and is not expected to be
realized in a tax-free manner, the Company records a deferred tax liability.
The Company's deferred tax liability includes, among other things, the initial
tax effect of $1.8 million for the difference in the financial reporting and tax
basis of the Company's investment in CorVel following the initial public
offering along with the income taxes recorded on the equity in earnings of
CorVel of $897,000 in 1997, $869,000 in 1996, and $794,000 in 1995.

The Company was allocated, as required under the federal consolidated
income tax regulations, approximately $8,100,000 of net operating loss
carryforwards from North Star at the time of its merger with Michael Foods. The
tax benefit of a portion of these available carryforwards, $2,776,000, was
treated as additional capital invested by North Star and the Company's deferred
tax liability was reduced by a like amount. Should any of the tax benefit of
loss carryforwards, currently reserved in the amount of $382,000, be recognized
in future periods, they will be treated as an additional capital contribution
in the period utilized. At December 31, 1997, the entire operating loss
carryforward was available to the Company. These loss carryforwards begin to
expire in 2009.

F-10
<PAGE>

ENSTAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

NOTE 6 -- COMMITMENTS AND CONTINGENCIES

LEASING COMMITMENTS The Company leases certain equipment and facilities
under operating leases. The future aggregate minimum rental payments under such
leases which expire at various dates through 2002 are as follows (in thousands):

<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
----------------------------------
<S> <C>
1998.................. $ 691
1999.................. 673
2000.................. 480
2001.................. 307
2002.................. 126
Thereafter............ --
--------
$ 2,277
--------
--------
</TABLE>

Certain of the leases provide for payment of taxes and other expenses.
Total rent expense on all leases including month-to-month leases for the years
ended December 31 was $1,069,000 in 1997, $1,029,000 in 1996, and $939,000 in
1995.

CONTINGENCIES As a result of the transfer of a substantial portion of the
assets of North Star to ENStar, ENStar entered into a supplemental indenture
with North Star in which ENStar assumed the obligations of North Star with
respect to certain debenture indebtedness of North Star. North Star however,
separately agreed to satisfy, and hold ENStar harmless from, all payment and
other obligations with respect to such debenture indebtedness. The amount of
such indebtedness, net of cash transferred to Michael Foods, was $21,250,000 at
the date of the North Star merger with Michael Foods. During 1997, Michael
Foods repaid all outstanding indebtedness under the old North Star debenture
program. In addition, ENStar, through the operation of an indemnification
agreement, is contingently liable for any, and all, liabilities arising from the
activities of North Star, through, and including, the reorganization of North
Star and Michael Foods. Under the terms of the indemnification agreement, the
Company is required to maintain certain minimum levels of market capitalization
or net worth for a period of five years.

NOTE 7 -- EMPLOYEE RETIREMENT PLAN

ENStar maintains an incentive savings plan for its employees. Full-time
employees that meet certain requirements are eligible to participate in the
plan. Contributions are made annually, primarily at the discretion of ENStar's
Board of Directors. Contributions of $281,000, $189,000, and $144,000, were
charged to operations in the years ended December 31, 1997, 1996 and 1995.

NOTE 8 -- STOCK OPTIONS

The Company and each of its operating subsidiaries maintain non-qualified
stock option plans in their own stock for the benefit of selected officers and
key employees. These original plans were approved by the respective Company's
Board of Directors in 1996. The ENStar plan reserved 300,000 shares for
issuance. At December 31, 1997, 347,100 options to acquire ENStar shares have
been issued subject to additional authorized shares being approved by the
Company's shareholders. The Americable plan reserved 600,000 shares for
issuance, while the Transition plan reserved 750,000 shares. Options granted to
date under all plans have been at fair market value on the date of the grant.
Each grant awarded specifies the period for which the options are exercisable,
the rate at which they vest, and provides that the options shall expire at the
end of such period.

F-11
<PAGE>

ENSTAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

Option transactions under these plans since adoption are summarized as
follows:

<TABLE>
<CAPTION>
ENStar Americable Transition
--------------------- --------------------- --------------------
Weighted Weighted Weighted
Number average Number average Number average
of exercise of exercise of exercise
shares price shares price shares price
-------- -------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at January 1, 1996 -- $ -- -- $ -- -- $ --
Granted 77,100 9.00 345,000 0.82 298,500 1.25
-------- ------- -------- ------- ------- -------

Outstanding at December 31, 1996 77,100 9.00 345,000 0.82 298,500 1.25
Granted 270,000 7.38 45,000 0.82 70,000 1.25
Cancelled -- -- (240,000) 0.82 (64,250) 1.25
-------- ------- -------- ------- ------- -------

Outstanding at December 31, 1997 347,100 $7.74 150,000 $0.82 304,250 $1.25
-------- ------- -------- ------- ------- -------
-------- ------- -------- ------- ------- -------

Options exercisable at December 31:
1996 -- $-- 101,000 $0.82 16,100 $1.25
-------- ------- -------- ------- ------- -------
-------- ------- -------- ------- ------- -------

1997 19,275 $ 9.00 40,000 $ 0.82 60,850 $ 1.25
-------- ------- -------- ------- ------- -------
-------- ------- -------- ------- ------- -------
</TABLE>

The following table summarizes information concerning currently outstanding
options:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING

Weighted average
Number remaining Weighted average
of shares contractual life and exercise price
------------- ------------------ ------------------
<S> <C> <C> <C>
ENStar 270,000 9.9 years $ 7.38
77,100 8.2 years $ 9.00
-------

347,100
-------
-------

Americable 150,000 9.3 years $ 0.82
-------
-------

Transition 304,250 9.2 years $ 1.25
-------
-------
</TABLE>

Had the Company or its operating subsidiaries elected to use the fair value
method for valuing options granted, the pro forma effect on net income would
have been an additional expense of $69,000, or 1 cent per share in 1997, and
$73,000, or 2 cents per share in 1996. The impact on net income (loss) may not
be representative of future disclosures because they do not take into effect pro
forma compensation expense related to grants made before 1995.

F-12
<PAGE>

ENSTAR INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

The following represents the weighted average fair value of options granted
for the respective entities and the weighted average assumptions used in the
Black-Scholes option pricing model:

<TABLE>
<CAPTION>
Enstar Americable Transition
---------------------- ---------------------- ----------------------
1997 1996 1997 1996 1997 1996
---------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
Fair value of
options granted $ 2.76 $ 3.89 $ 0.41 $ 0.52 $ 0.49 $ 0.48

Assumptions used:
Dividends $ -- $ -- $ -- $ -- $ -- $ --
Volatility 49.6% 57.5% 70.0% 98.0% 49.0% 49.0%
Risk-free interest rate 5.5% 5.5% 5.9% 5.9% 5.9% 5.9%
Expected option term 3 years 3 years 3 years 3 years 3 years 3 years
</TABLE>

NOTE 9 -- RELATED PARTY TRANSACTION

At December 31, 1995, ENStar had an unsecured note receivable from North
Star's majority shareholder and former chairman of the board of $257,872 which
was paid in full during 1996.

NOTE 10 -- GEOGRAPHIC AREA AND BUSINESS SEGMENT INFORMATION

The Company, through Transition, has sales throughout the world.
Substantially all of the export sales are denominated in U.S. dollars. Revenues
classified by major geographic area are as follows:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Revenues from unaffiliated customers in $ 48,288 $ 58,124 $ 49,668
the United States.........................
Europe.................................... 4,141 4,192 3,363
Other..................................... 1,923 1,807 1,860
-------- -------- --------
$ 54,352 $ 64,123 $ 54,891
-------- -------- --------
-------- -------- --------
</TABLE>

F-13
<PAGE>

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Board of Directors
ENStar Inc.

We have audited the accompanying consolidated balance sheets of ENStar Inc.
(a Minnesota corporation) and subsidiaries, as of December 31, 1997 and 1996 and
the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the three years in the period ended December 31, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating overall financial statement presentation. We
believe our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
ENStar Inc. and subsidiaries as of December 31, 1997 and 1996, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.

We have also audited schedule II for each of the three years in the period
ended December 31, 1997. In our opinion, this schedule, when considered in
relationship to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.

/s/ GRANT THORNTON LLP

Minneapolis, Minnesota
February 18, 1998

F-14
<PAGE>

ENSTAR INC.

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31,
(IN THOUSANDS)

<TABLE>
<CAPTION>
ADDITIONS
-----------------------
CHARGES
BALANCE AT CHARGED TO TO OTHER BALANCE
BEGINNING COSTS AND ACCOUNTS DEDUCTIONS- AT END OF
DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE(1) PERIOD
----------------------------- --------- -------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful Accounts:
1995 . . . . . . . . . . . . . . . . $333 $135 $-- $(68) $400
1996 . . . . . . . . . . . . . . . . 400 132 -- (92) 440
1997 . . . . . . . . . . . . . . . . 440 145 -- (171) 414

- ---------------
</TABLE>
(1) Write off of accounts deemed uncollectible.

F-15

<PAGE>

REPORT OF INDEPENDENT AUDITORS

Stockholders and Board of Directors
CorVel Corporation

We have audited the accompanying consolidated balance sheets of CorVel
Corporation as of March 31, 1996 and 1997, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the
three years in the period ended March 31, 1997. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These financial
statements and this schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable
basis for our opinion.

In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of CorVel Corporation at March 31, 1996 and 1997, and the
consolidated results of its operations and its cash flows for each of the
three years in the period ended March 31, 1997, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relationship to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.

/s/ ERNST & YOUNG LLP

Orange County, California
May 8, 1997

S-1

<PAGE>

CORVEL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------------
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . . $95,783,000 $109,052,000 $121,704,000

Costs and Expenses
Cost of revenues . . . . . . . . . . . . . . . 78,950,000 88,937,000 99,323,000
General and administrative . . . . . . . . . . 7,186,000 8,106,000 8,645,000
------------ ------------ ------------
86,136,000 97,043,000 107,968,000
------------ ------------ ------------
Income before income taxes . . . . . . . . . . 9,647,000 12,009,000 13,736,000
Income tax provision . . . . . . . . . . . . . 3,762,000 4,684,000 5,220,000
------------ ------------ ------------
Net Income . . . . . . . . . . . . . . . . . . $ 5,885,000 $ 7,325,000 $ 8,516,000
------------ ------------ ------------
------------ ------------ ------------
Basic earnings per share . . . . . . . . . . . $1.42 $1.65 $1.86
------------ ------------ ------------
------------ ------------ ------------
Weighted shares for basic earnings per share . 4,138,000 4,435,000 4,585,000

Diluted earnings per share . . . . . . . . . . $1.30 $1.57 $1.82
------------ ------------ ------------
------------ ------------ ------------
Weighted shares for diluted earnings per
share. . . . . . . . . . . . . . . . . . . . 4,531,000 4,660,000 4,685,000

</TABLE>

See accompanying notes to consolidated financial statements.

S-2
<PAGE>

CORVEL CORPORATION

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
MARCH 31,
-----------------------------
1996 1997
------------ -----------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . $17,113,000 $15,665,000
Accounts receivable (less allowance for
doubtful accounts of $1,268,000 in 1996
and $1,686,000 in 1997). . . . . . . . . . . . . . . . . . . . . 18,394,000 22,294,000
Prepaid taxes and expenses. . . . . . . . . . . . . . . . . . . . 545,000 124,000
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . 2,032,000 1,746,000
----------- -----------
Total current assets. . . . . . . . . . . . . . . . . . . . . . 38,084,000 39,829,000
----------- -----------
Property and equipment, net. . . . . . . . . . . . . . . . . . . . 11,468,000 13,100,000
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,432,000 5,895,000
----------- -----------
$53,984,000 $58,824,000
----------- -----------
----------- -----------

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts and taxes payable. . . . . . . . . . . . . . . . . . . . $ 3,057,000 $ 6,603,000
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . 4,246,000 4,630,000
----------- -----------
Total current liabilities . . . . . . . . . . . . . . . . . . . 7,303,000 11,233,000
----------- -----------
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . 1,370,000 1,504,000
Commitments and contingencies
Stockholders' equity
Common stock, $.0001 par value: 20,000,000 shares authorized;
4,593,675 and 4,697,853 shares issued and outstanding in
1996 and 1997, respectively
Paid in capital. . . . . . . . . . . . . . . . . . . . . . . . . . 26,401,000 28,122,000
Treasury Stock, at cost (no shares in 1996,
357,000 shares in 1997) . . . . . . . . . . . . . . . . . . . . . -- (9,461,000)
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . 18,910,000 27,426,000
----------- -----------
Total stockholders' equity . . . . . . . . . . . . . . . . . . 45,311,000 46,087,000
----------- -----------
$53,984,000 $58,824,000
----------- -----------
----------- -----------
</TABLE>

See accompanying notes to the consolidated financial statements.

S-3

<PAGE>

CORVEL CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

COMMON COMMON STOCK TOTAL
STOCK AND TREASURY TREASURY RETAINED SHAREHOLDERS'
SHARES PAID IN CAPITAL SHARES SHARES-COST EARNINGS EQUITY
---------- --------------- ----------- ------------ ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Balance -- March 31, 1994. . . . . . . . . . 4,071,195 $21,625,000 -- $ -- $ 5,700,000 $ 27,325,000
Stock issued under employee stock
purchase plan. . . . . . . . . . . . . . . 19,634 374,000 -- -- -- 374,000
Stock issued under employee stock option
plan and related income tax
benefits 147,421 2,170,000 -- -- -- 2,170,000
Net income . . . . . . . . . . . . . . . . -- -- -- -- 5,885,000 5,885,000
--------- ----------- -------- ----------- ----------- -----------
Balance -- March 31, 1995. . . . . . . . . . 4,238,250 24,169,000 -- -- 11,585,000 35,754,000
--------- ----------- -------- ----------- ----------- -----------
Stock issued under employee stock
purchase plan. . . . . . . . . . . . . . . 18,384 444,000 -- -- -- 444,000
Stock issued under employee stock option
plan and related income tax benefits,
net of shares repurchased upon
exercise . . . . . . . . . . . . . . . . . 337,041 1,788,000 -- -- -- 1,788,000
Net income . . . . . . . . . . . . . . . . -- -- -- -- 7,325,000 7,325,000
--------- ----------- -------- ----------- ----------- -----------
Balance -- March 31, 1996. . . . . . . . . . 4,593,675 26,401,000 -- -- 18,910,000 45,311,000
--------- ----------- -------- ----------- ----------- -----------
Stock issued under employee stock
purchase plan 23,039 536,000 -- -- -- 536,000
Stock issued under employee stock option
plan and related income tax
benefits 81,139 1,185,000 -- -- -- 1,185,000
Purchase of common stock . . . . . . . . . -- -- (357,000) (9,461,000) -- (9,461,000)
Net income . . . . . . . . . . . . . . . . -- -- -- -- 8,516,000 8,516,000
--------- ----------- -------- ----------- ----------- -----------
Balance -- March 31, 1997. . . . . . . . . . 4,697,853 $28,122,000 (357,000) $(9,461,000) $27,426,000 $46,087,000
--------- ----------- -------- ----------- ----------- -----------
--------- ----------- -------- ----------- ----------- -----------

</TABLE>

See accompanying notes to consolidated financial statements.

S-4

<PAGE>

CORVEL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

Year Ended March 31,
---------------------------------------------
1995 1996 1997
----------- ------------ -----------
<S> <C> <C> <C>
Cash flows from operating activities
Net income. . . . . . . . . . . . . . . . . . . . . $ 5,885,000 $ 7,325,000 $ 8,516,000
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization . . . . . . . . . . . 2,335,000 3,048,000 4,215,000
Deferred income taxes . . . . . . . . . . . . . . . (44,000) (79,000) 420,000
Loss on write down and disposal of
property and equipment. . . . . . . . . . . . . . . 39,000 23,000 96,000
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . (2,657,000) (2,526,000) (3,900,000)
Prepaid taxes and expenses. . . . . . . . . . . . . 795,000 (363,000) 421,000
Accounts and taxes payable. . . . . . . . . . . . . 27,000 700,000 3,546,000
Accrued liabilities . . . . . . . . . . . . . . . . 538,000 (382,000) 384,000
Other assets. . . . . . . . . . . . . . . . . . . . (425,000) (511,000) (1,607,000)
------------- ------------- -------------
Net cash provided by operating activities . . . . . 6,493,000 7,235,000 12,091,000
------------- ------------- -------------
Cash flows from investing activities
Purchases of property and equipment . . . . . . . . (4,219,000) (5,565,000) (5,799,000)
------------- ------------- -------------
Net cash used in investing activities . . . . . . . (4,219,000) (5,565,000) (5,799,000)

Cash flows from financing activities
Proceeds and tax benefits from exercise of stock
Options . . . . . . . . . . . . . . . . . . . . . 2,544,000 2,232,000 1,721,000
Purchase of common stock. . . . . . . . . . . . . . -- -- (9,461,000)
------------- ------------- -------------

Net cash provided by (used in) financing activities 2,544,000 2,232,000 (7,740,000)
------------- ------------- -------------
Net increase (decrease) in cash
and cash equivalents. . . . . . . . . . . . . . . . 4,818,000 3,902,000 (1,448,000)
Cash and cash equivalents at beginning of year. . . . 8,393,000 13,211,000 17,113,000
------------- ------------- -------------
Cash and cash equivalents at end of year. . . . . . . $ 13,211,000 $ 17,113,000 $ 15,665,000
------------- ------------- -------------
------------- ------------- -------------

</TABLE>

See accompanying notes to consolidated financial statements.

S-5

<PAGE>

CORVEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997

NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION: CorVel Corporation ("CorVel" or "the Company") provides
services and programs nationwide that are designed to enable insurance carriers,
third party administrators and employers with self-insured programs to
administer, manage and control the cost of workers' compensation and other
healthcare benefits.

BASIS OF PRESENTATION: The consolidated financial statements include the
accounts of CorVel and its subsidiaries. Significant intercompany accounts and
transactions have been eliminated in consolidation.

USE OF ESTIMATES: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the accompanying
financial statements. Actual results could differ from those estimates.

CASH AND CASH EQUIVALENTS: Cash and cash equivalents consists of
short-term, highly-liquid investments with maturities of 90 days or less when
purchased. The carrying amounts of the Company's financial instruments
approximate their relative fair values at March 31, 1996 and 1997.

CONCENTRATIONS OF CREDIT RISK: The Company performs periodic credit
evaluations of its customers' financial condition and does not require
collateral. No customer represented 10% of accounts receivable at March 31, 1996
and 1997. Receivables generally are due within 60 days. Credit losses relating
to customers in the workers compensation insurance industry consistently have
been within management's expectations.

PROPERTY AND EQUIPMENT: Additions to property and equipment are recorded at
cost. Depreciation and amortization are provided using the straight-line and
accelerated methods over the estimated useful lives of the related assets which
range from three to seven years.

LONG-LIVED ASSETS: The carrying amount of all long-lived assets is
evaluated periodically to determine if adjustment to the depreciation and
amortization period or to the unamortized balance is warranted. Such evaluation
is based principally on the expected utilization of the long-lived assets and
the projected, undiscounted cash flows of the operations in which the long-lived
assets are deployed.

OTHER ASSETS: Other assets consists primarily of the excess of the purchase
price over the estimated fair value of the net assets of businesses acquired
(goodwill) and is being amortized using the straight-line method over periods
not exceeding 40 years. Goodwill amounted to $3,636,000 (net of accumulated
amortization of $754,000) at March 31, 1996 and $4,886,000 (net of accumulated
amortization of $898,000) at March 31, 1997.

REVENUE RECOGNITION: The Company's revenues are recognized primarily as
services are rendered based on time and expenses incurred. A certain portion of
the Company's revenues are derived from fee schedule auditing which is based on
the number of provider charges audited and, to a limited extent, on a percentage
of savings achieved for the Company's clients. Accounts receivable includes
$1,527,000 and $1,580,000 of unbilled receivables at March 31, 1996 and 1997,
respectively. No one customer accounted for more than 10% of consolidated
revenues during the years ended March 31, 1995, 1996 and 1997.

INCOME TAXES: The consolidated financial statements reflect the application
of Statement of Financial Accounting Standards No. 109 -- "Accounting for Income
Taxes".

INCOME PER SHARE: The Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" (SFAS No. 128), which replaced the
calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Basic earnings per share is computed by dividing
income available to common shareholders by the weighted - average number of
common shares outstanding for the period. Diluted earnings per share reflects
the assumed conversion of all dilutive securities. Earnings per share amounts
for all periods presented have been calculated in accordance with the
requirements of SFAS No. 128.

S-6

<PAGE>

CORVEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
MARCH 31, 1997

STOCK OPTION PLANS: Effective April 1, 1996, the Company has adopted the
disclosure-only provisions of Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" (SFAS 123) and accordingly, is
continuing to account for its stock-based compensation plans under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and
related interpretations. The adoption of SFAS No. 123 had no impact on the
Company's consolidated results of operations or financial position.

NOTE B -- PROPERTY AND EQUIPMENT

Property and equipment consists of the following at March 31:

1996 1997
------------ -------------
<S> <C> <C>
Office equipment and computers............ $15,542,000 $19,875,000
Computer software......................... 4,207,000 5,186,000
Leasehold improvements.................... 613,000 784,000
------------ -------------
20,362,000 25,845,000

Less: accumulated depreciation
and amortization........................ 8,894,000 12,745,000
------------ -------------
$11,468,000 $13,100,000
------------ -------------
------------ -------------

</TABLE>

NOTE C -- ACCRUED LIABILITIES

Accrued liabilities consists of the following at March 31:

1996 1997
---------- ----------
<S> <C> <C>
Payroll and related benefits.............. $2,366,000 $2,891,000
Self insurance reserves................. 737,000 599,000
Other................................... 1,143,000 1,140,000
---------- ----------
$4,246,000 $4,630,000
---------- ----------
---------- ----------

</TABLE>

NOTE D -- INCOME TAXES

The income tax provision consists of the following for the three years
ended March 31:

1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Current -- Federal . . . . . . . . $3,172,000 $4,045,000 $4,212,000
Current -- State . . . . . . . . . 634,000 718,000 588,000
Utilization of net operating loss. (538,000) -- --
------------ ------------ ------------
3,268,000 4,763,000 4,800,000
------------ ------------ ------------

Deferred -- Federal. . . . . . . . (37,000) (102,000) 368,000
Deferred -- State. . . . . . . . . (7,000) 23,000 52,000
------------ ------------ ------------
Subtotal. . . . . . . . . . . . (44,000) (79,000) 420,000
------------ ------------ ------------

Utilization of net operating
loss carryovers. . . . . . . . . 538,000 -- --
------------ ------------ ------------
$3,762,000 $4,684,000 $5,220,000
------------ ------------ ------------
------------ ------------ ------------

</TABLE>

Income tax benefits associated with the exercise of stock options were $991,000,
$4,245,000, and $228,000 for fiscal 1995, 1996, and 1997, respectively.

S-7

<PAGE>

CORVEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --
MARCH 31, 1997 (Continued)

Note D -- INCOME TAXES (continued)

The following is a reconciliation of the income tax provision from the
statutory federal income tax rate to the effective rate for the three years
ended March 31:

1995 1996 1997
------------- --------------- ------------
<S> <C> <C> <C>
Income taxes at federal statutory rate.............. $ 3,377,000 $ 4,203,000 $ 4,808,000
State income taxes, net of federal benefit.......... 399,000 446,000 423,000
Goodwill amortization............................... 35,000 37,000 40,000
Other............................................... (49,000) (2,000) (51,000)
------------- --------------- ------------
$ 3,762,000 $ 4,684,000 $ 5,220,000
------------- --------------- ------------
------------- --------------- ------------

</TABLE>

Income taxes paid totaled $1,100,000, $1,193,000, and $1,683,000 for the
years ended March 31, 1995, 1996, and 1997, respectively. At March 31, 1994,
the Company had net operating loss (NOLs) carryforwards of $1,600,000 for income
tax purposes. A valuation allowance of $538,000 was recorded in 1994 to offset
the deferred tax assets related to the NOLs. This $538,000 valuation allowance
was applied to additional paid-in capital in 1995 since the related NOLs were
principally attributable to deductions for the exercise of non-qualified stock
options in 1994.

Deferred taxes at March 31, 1996 and 1997 are:
<TABLE>
<CAPTION>

1996 1997
--------------- -------------
<S> <C> <C>
Deferred tax assets:
Accrued liabilities not currently deductible................ $ 1,310,000 $ 939,000
Allowance for doubtful accounts............................. 495,000 580,000
Other....................................................... 227,000 227,000
--------------- -------------
Deferred assets.......................................... $ 2,032,000 $ 1,746,000
--------------- -------------
Deferred tax liabilities:
Excess of tax under book basis of fixed assets.............. (1,370,000) (1,504,000)
--------------- -------------
Deferred liability....................................... (1,370,000) (1,504,000)
--------------- -------------
Net deferred tax asset........................................ $ 662,000 $ 242,000
--------------- -------------
--------------- -------------

</TABLE>

NOTE E -- STOCK OPTION PLANS

The Company has elected to follow Account Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under SFAS
No. 123 requires use of option valuation models that were not developed for use
in valuing employee stock options. Under APB 25, because the exercise price of
the Company's employee stock options equals the market price of the underlying
stock on the date of grant, no compensation expense is recognized.

Under the Company's Restated 1998 Executive Stock Option Plan, as amended,
options for up to 1,535,000 shares of the Company's common stock may be granted
to key employees, nonemployee directors and consultants at prices not less than
85% of the fair value of the stock at the date of grant as determined by the
Board. Options granted under the Plan may be either incentive stock options or
non-statutory stock options and are generally exercisable beginning one year
from the date of grant and vest monthly thereafter for three years. In addition
to the aforementioned Plan, the Company's President was issued an option to
purchase 750,000 shares of common stock at an exercise price of $.0001 per share
in January 1988. As of March 31, 1997, all of these options have vested and
options to purchase 60,000 shares of common stock are outstanding.

S-8

<PAGE>

CORVEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --
MARCH 31, 1997 (Continued)

Note E -- Stock Option Plans (continued)

Summarized information for all of the stock options follows:
<TABLE>
<CAPTION>

1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Options outstanding at the beginning of the year . $903,867 $ 827,018 $ 423,411
Options granted. . . . . . . . . . . . . . . . . . 88,850 81,300 126,450
Options exercised. . . . . . . . . . . . . . . . . (147,421) (468,572) (81,139)
Options cancelled. . . . . . . . . . . . . . . . . (18,278) (16,335) (12,890)
--------- --------- ---------
Options outstanding at the end of year . . . . . . $827,018 $ 423,411 $ 455,832
--------- --------- ---------
--------- --------- ---------

During the year:
Weighted average price of options granted. . . . $ 22.26 $ 25.19 $ 28.48
Weighted average price of options exercised. . . $ 4.36 $ 2.54 $ 11.71
Weighted average price of options canceled . . . $ 15.25 $ 18.40 $ 22.80

At the end of the year:
Price range of outstanding options . . . . . . . $ .0001- $ .0001- $ .0001-
$ 26.50 $ 31.50 $ 31.50
Weighted average price per share . . . . . . . . $ 7.38 15.73 19.77
Options available for future grants. . . . . . . 266,988 202,444 288,884
Exercisable options. . . . . . . . . . . . . . . 622,348 242,575 244,881

</TABLE>

The following table summarizes the status of fixed stock options outstanding and
exercisable at March 31, 1997:

Outstanding Exercisable
Weighted Options- Options-
Average Weighted Weighted
Remaining Average Number of Average
Range of Number of Contractual Exercise Exercisable Exercise
Exercise Prices Options Life Price Options Price
-------------- --------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
$.0001-$.0001 60,000 .76 years $.0001 60,000 $.0001
10.75 - 15.00 71,640 .81 years 12.67 69,859 12.72
17.00 - 23.00 148,002 2.70 years 21.07 95,299 20.88
25.50 - 31.50 176,190 5.11 years 28.33 19,723 27.79
------- ----------- ------ -------- -------
455,832 3.08 years $19.77 244,881 $13.99
------- ----------- ------ -------- -------
------- ----------- ------ -------- -------

</TABLE>

The Company has adopted the disclosure-only provisions of SFAS No. 123.
Had compensation cost for the Company's stock option and stock purchase
plans been recorded consistent with the provisions of SFAS No. 123, pro forma
net income would have been reduced to $7,251,000 and $8,315,000 from
$7,325,000 and $8,516,000 for the years ended March 31, 1996 and 1997,
respectively. Pro forma basic earnings per share would have been reduced to
$1.63 and $1.81 from $1.65 and $1.86 for the years ended March 31, 1996 and
1997, respectively. Pro forma diluted earnings per share would have been
reduced to $1.56 and $1.77 from $1.57 and $1.82 for the years ended March 31,
1996 and 1997, respectively.

The fair value of each plan is estimated on the date of grant using the
Black-Scholes option-pricing model. The following weighted average assumptions
were used for fiscal 1996: expected volatility of .45; risk free interest rate
of 6.4%. The following weighted average assumptions were used for fiscal 1997:
expected volatility of .41; risk free interest rate of 6.4%. The assumptions
for both years reflect no dividend yield and a weighted average option life of
three years.

S-9

<PAGE>

CORVEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
MARCH 31, 1997

Note E -- STOCK OPTION PLANS (continued)

The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.

Because SFAS 123 is applicable only to the Company's options granted
subsequent to April 1, 1995, its pro forma effect will not be fully reflected
until 1999. The aforementioned results are not likely to be representative of
the effects of applying SFAS 123 on reported net income for future years as
these amounts reflect the expense for only one or two years of vesting.

NOTE F - EMPLOYEE STOCK PURCHASE PLAN

The Company maintains an Employee Stock Purchase Plan which allows
employees of the Company and its subsidiaries to purchase shares of common stock
on the last day of two six-month purchase periods (i.e. March 31 and September
30) at a purchase price which is 85% of the closing sale price of shares as
quoted on NASDAQ on the first or last day of such purchase period,
whichever is lower. Employees are allowed to participate up to 20% of their
gross pay. A maximum of 150,000 shares has been authorized for issuance under
the plan. As of March 31, 1997, 114,141 shares had been issued pursuant to the
plan. Summarized plan information is as follows:

1995 1996 1997
-------- --------- --------
<S> <C> <C> <C>
Employee contributions........ $374,000 $ 444,000 $536,000
Shares acquired............... 19,634 18,384 23,039
Average purchase price........ $ 19.02 $ 24.15 $ 23.27

</TABLE>

NOTE G -- TREASURY STOCK

In August 1996, the Company announced that its Board of Directors had
approved a plan to repurchase up to 100,000 shares, or approximately 2% of the
Company's then outstanding Common Stock. The Company's Board of Directors
subsequently increased the number of shares authorized to repurchase to a total
of 550,000 shares, or approximately 12% of the Company's stock. Through March
31, 1997, the Company had repurchased 357,000 shares of its common stock for
$9,461,000, at prices ranging from $24.63 to $30.00 per share, with an average
price of $26.50. The stock was recorded as treasury stock, at cost, and is
available for general corporate purposes. The repurchases were financed from
cash generated from operations.

NOTE H -- COMMITMENTS AND CONTINGENCIES

The Company leases office facilities under noncancelable operating leases.
Future minimum rental commitments under operating leases at March 31, 1997 are
4,013,000 in fiscal 1998, $2,896,000 in fiscal 1999, $2,166,000 in fiscal 2000,
$1,194,000 in fiscal 2001, $547,000 in fiscal 2002, and $69,000 thereafter.
Total rental expense of $3,559,000, $3,901,000, and $4,573,000 was charged to
operations for the years ended March 31, 1995, 1996, and 1997, respectively.

The Company is involved in litigation arising in the normal course of
business. The Company believes that resolution of these matters will not result
in any payment that, in the aggregate, would be material to the financial
position and results of the operations of the Company.

S-10

<PAGE>

CORVEL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, 1997

NOTE I -- SAVINGS PLAN

The Company maintains a retirement savings plan for its employees which is a
qualified plan under section 401(k) of the Internal Revenue Code. Full-time
employees that meet certain requirements are eligible to participate in the
plan. Contributions are made annually primarily at the discretion of the
Company's Board of Directors. Contributions of $157,000, $50,000, and $135,000
were charged to operations for the years ended March 31, 1995, 1996, and 1997,
respectively.

NOTE J -- SHAREHOLDER RIGHTS PLAN

During fiscal 1997, the Company's Board of Directors approved the adoption
of a Shareholder Rights Plan. The Rights Plan, which is similar to rights
plans adopted by numerous other public companies, provides for a dividend
distribution to CorVel stockholders of one preferred stock purchase "Right"
for each outstanding share of CorVel's common stock. The Rights are designed
to assure that all stockholders receive fair and equal treatment in the event
of any proposed takeover of the company and to encourage a potential acquirer
to negotiate with the Board of Directors prior to attempting a takeover. The
Rights have an exercise price of $125.00 per Right, subject to subsequent
adjustment. Initially, the Rights will trade with the company's common
stock, and will not be exercisable until the occurrence of certain
takeover-related events. The issuance of the Rights has no dilutive effect
on the Company's earnings per share.

NOTE K -- QUARTERLY RESULTS

The following is a summary of unaudited results of operations for the two
years ended March 31, 1996 and 1997:
<TABLE>
<CAPTION>

WEIGHTED SHARES FOR
EARNINGS PER SHARE EARNINGS PER SHARE
GROSS ------------------ --------------------
REVENUES PROFIT NET INCOME BASIC DILUTED BASIC DILUTED
----------- ----------- ----------- ------------------ --------------------
<S> <C> <C> <C> <C> <C>
FISCAL YEAR ENDED MARCH 31, 1996:
First Quarter . . . . . . . . . . . . . $26,779,000 $4,856,000 $1,701,000 $ .40 $ .37 4,292,000 4,592,000
Second Quarter. . . . . . . . . . . . . 26,863,000 4,989,000 1,818,000 .41 .39 4,410,000 4,643,000
Third Quarter . . . . . . . . . . . . . 27,082,000 5,127,000 1,887,000 .42 .40 4,462,000 4,697,000
Fourth Quarter. . . . . . . . . . . . . 28,328,000 5,143,000 1,919,000 .42 .41 4,575,000 4,707,000
FISCAL YEAR ENDED MARCH 31, 1997:
First Quarter . . . . . . . . . . . . . $29,851,000 $5,390,000 $2,042,000 $ .44 $ .43 4,626,000 4,746,000
Second Quarter. . . . . . . . . . . . . 29,719,000 5,488,000 2,092,000 .45 .44 4,656,000 4,760,000
Third Quarter . . . . . . . . . . . . . 30,441,000 5,681,000 2,177,000 .47 .46 4,642,000 4,732,000
Fourth Quarter. . . . . . . . . . . . . 31,693,000 5,822,000 2,205,000 .50 .49 4,418,000 4,501,000

</TABLE>
S-11

<PAGE>

SCHEDULE II

CORVEL CORPORATION

VALUATION AND QUALIFYING ACCOUNTS

ADDITIONS
BALANCE AT CHARGED TO
BEGINNING COSTS AND BALANCE AT
OF YEAR EXPENSES DEDUCTIONS END OF PERIOD
------------ ------------ ------------- --------------
<S> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Year Ended March 31, 1997:. . . . . . . . . . . $1,268,000 $1,763,000 $ (1,345,000) $1,686,000
Year Ended March 31, 1996:. . . . . . . . . . . 825,000 500,000 (57,000) 1,268,000
Year Ended March 31, 1995:. . . . . . . . . . . 725,000 100,000 -- 825,000

</TABLE>

S-12

<PAGE>

CORVEL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>

NINE MONTHS ENDED
DECEMBER 31,
-------------------------------
1996 1997
------------ ------------
<S> <C> <C>
REVENUES. . . . . . . . . . . . . . . . . . . . . . . . . $90,011,000 $104,265,000
Cost of Revenues. . . . . . . . . . . . . . . . . . . . . 73,452,000 84,728,000
------------ ------------
Gross profit. . . . . . . . . . . . . . . . . . . . . . . 16,559,000 19,537,000
General and administrative expenses . . . . . . . . . . . 6,380,000 8,164,000
------------ ------------
Income before income taxes. . . . . . . . . . . . . . . . 10,179,000 11,373,000
Income tax provision. . . . . . . . . . . . . . . . . . . 3,868,000 4,322,000
------------ ------------

NET INCOME. . . . . . . . . . . . . . . . . . . . . . . . $ 6,311,000 $ 7,051,000
------------ ------------
------------ ------------

BASIC EARNINGS PER SHARE. . . . . . . . . . . . . . . . . $ 1.36 $ 1.67
------------ ------------
------------ ------------

Weighted shares for basic earnings per share. . . . . . . 4,640,000 4,211,000

DILUTED EARNINGS PER SHARE. . . . . . . . . . . . . . . . $ 1.33 $ 1.63
------------ ------------
------------ ------------

Weighted shares for diluted earnings per share. . . . . . 4,746,000 4,314,000

</TABLE>

See accompanying notes to consolidated financial statements.

S-13

<PAGE>

CORVEL CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>

MARCH 31, DECEMBER 31,
1997 1997
----------- ------------
(AUDITED) (UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents . . . . . . . . . . . . . $15,665,000 $11,080,000
Accounts receivable, net. . . . . . . . . . . . . . 22,294,000 24,957,000
Prepaid taxes and expenses. . . . . . . . . . . . . 124,000 227,000
Deferred income taxes . . . . . . . . . . . . . . . 1,746,000 500,000
----------- ------------
Total current assets . . . . . . . . . . . . . . 39,829,000 36,764,000
----------- ------------
Property and equipment, net . . . . . . . . . . . . 13,100,000 15,501,000
Other assets. . . . . . . . . . . . . . . . . . . . 5,895,000 6,594,000
----------- ------------
Total assets . . . . . . . . . . . . . . . . . . $58,824,000 $58,859,000
----------- ------------
----------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable. . . . . . . . . . . . . . . . . . $ 6,603,000 $ 6,341,000
Accrued liabilities . . . . . . . . . . . . . . . . 4,630,000 6,019,000
----------- ------------
Total current liabilities. . . . . . . . . . . . 11,233,000 12,360,000
----------- ------------

Deferred income taxes . . . . . . . . . . . . . . . 1,504,000 1,459,000

Stockholders' Equity
Common stock. . . . . . . . . . . . . . . . . . . . -- --
Paid-in capital . . . . . . . . . . . . . . . . . . 28,122,000 29,534,000
Treasury Stock, (357,000 shares at March 31,
1997 and 654,000 shares at December 31, 1997). . (9,461,000) (18,971,000)
Retained earnings . . . . . . . . . . . . . . . . . 27,426,000 34,477,000
----------- ------------
Total stockholders' equity . . . . . . . . . . . 46,087,000 45,040,000
----------- ------------

Total liabilities and equity. . . . . . . . $58,824,000 $58,859,000
----------- ------------
----------- ------------

</TABLE>

See accompanying notes to consolidated financial statements.

S-14

<PAGE>

CORVEL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

NINE MONTHS ENDED
DECEMBER 31,
-------------------------------
1996 1997
----------- -----------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities
Net income . . . . . . . . . . . . . . . . . . . . . . . $ 6,311,000 $ 7,051,000
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization. . . . . . . . . . . . . 2,981,000 3,335,000
Changes in operating assets and liabilities
Accounts receivable . . . . . . . . . . . . . . . . (1,881,000) (2,663,000)
Prepaid taxes and expenses. . . . . . . . . . . . . 1,068,000 1,143,000
Accounts payable. . . . . . . . . . . . . . . . . . 1,826,000 (262,000)
Accrued liabilities . . . . . . . . . . . . . . . . 899,000 1,389,000
Income taxes payable. . . . . . . . . . . . . . . . 991,000 (45,000)
Other assets. . . . . . . . . . . . . . . . . . . . (1,463,000) (749,000)
----------- -----------
Net cash provided by operating activities. . . . . . . . 10,732,000 9,199,000
----------- -----------
Cash flows from investing activities
Additions to property and equipment. . . . . . . . . . . (3,885,000) (5,686,000)
----------- -----------
Net cash used in investing activities. . . . . . . . . . (3,885,000) (5,686,000)
----------- -----------
Cash flows from financing activities
Repurchase of common stock . . . . . . . . . . . . . . . . (2,119,000) (9,510,000)
Sale of common and exercise of stock options and related
tax benefits . . . . . . . . . . . . . . . . . . . . . . 1,236,000 1,412,000
----------- -----------
Net cash provided by financing activities. . . . . . . . (883,000) (8,098,000)
----------- -----------
Increase (decrease) in cash. . . . . . . . . . . . . . . . 5,964,000 (4,585,000)
Cash and cash equivalents at beginning of year . . . . . . 17,113,000 15,665,000
----------- -----------

Cash and cash equivalents at end of year . . . . . . . . . $23,077,000 $11,080,000
----------- -----------
----------- -----------
</TABLE>

See accompanying notes to consolidated financial statements.

S-15

<PAGE>

CORVEL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(UNAUDITED)

A. BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the nine months ended December 31, 1997 are not
necessarily indicative of the results that may be expected for the year ended
March 31, 1998. For further information, refer to the consolidated financial
statements and footnotes thereto for the year ended March 31, 1997 included in
the Company's registration statement on Form 10-K.

B. Earnings per Share

The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" (SFAS No. 128), which replaced the calculation of
primary and fully diluted earnings per share with basic and diluted earnings
per share. Basic earnings per share is computed by dividing income available
to common shareholders by the weighted - average number of common shares
outstanding for the period. Diluted earnings per share reflects the assumed
conversion of all dilutive securities. Earnings per share amounts for all
periods presented have been calculated in accordance with the requirements of
SFAS No. 128.

S-16

<PAGE>

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

NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY SUCH
SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.

----------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
------
<S> <C>
Additional Information . . . . . . 2
Prospectus Summary . . . . . . . . 3
Risk Factors . . . . . . . . . . . 6
Ratio of Earnings to Fixed Charges 12
Use of Proceeds. . . . . . . . . . 12
Plan of Distribution . . . . . . . 12
Selected Financial Data. . . . . . 13
Management's Discussion and Analysis of
Results of Operations and Financial
Condition. . . . . . . . . . . . 14
Business . . . . . . . . . . . . . 19
Management . . . . . . . . . . . . 30
Security Ownership of Certain
Owners and Management . . . . . . 35
Description of Debentures. . . . . 37
Validity of Debentures . . . . . . 40
Experts. . . . . . . . . . . . . . 40
Index to Consolidated Financial
Statements . . . . . . . . . . . F-1
</TABLE>

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ENSTAR INC.

6.75% TWO YEAR
8.50% FIVE YEAR
9.75% TEN YEAR

SUBORDINATED DEBENTURES

----------

PROSPECTUS

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May 13, 1998
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