<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                   ----------

                                    FORM 10-K

       [X]      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                            SECURITIES EXCHANGE ACT OF 1934

                  For the fiscal year ended September 30, 2004

                                       OR

       [ ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                            THE SECURITIES EXCHANGE ACT OF 1934

              For the transition period from _________ to _________

                         COMMISSION FILE NUMBER: 0-10990

                            CASTLE ENERGY CORPORATION
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

                Delaware                                  76-0035225
    (STATE OR OTHER JURISDICTION OF                    (I.R.S. EMPLOYER
     INCORPORATION OR ORGANIZATION)                 IDENTIFICATION NUMBER)

    357 South Gulph Road, Suite 260
     King of Prussia, Pennsylvania                           19406
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                  (ZIP CODE)

     REGISTRANT'S TELEPHONE NUMBER:                     (610) 992-9900

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:  NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK -- $.50
PAR VALUE AND RELATED RIGHTS

        Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X]  No[ ]

        Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X].

        Indicate by check mark whether Registrant is an accelerated filer as
defined in Rule 12b-2 of the Act. Yes [ ]  No[X]

        As of December 1, 2004, there were 6,915,384 shares of the registrant's
Common Stock ($.50 par value) outstanding. The aggregate market value of voting
stock held by non-affiliates of the registrant as of such date was $67,207,741
(5,254,710 shares at $12.79 per share).

                      DOCUMENTS INCORPORATED BY REFERENCE:

        Portions of the Proxy Statement for the 2005 Annual Meeting of
Stockholders are incorporated by reference in Items 10, 11 and 12.

<PAGE>

                            CASTLE ENERGY CORPORATION
                                 2004 FORM 10-K
                                TABLE OF CONTENTS

ITEM                                                                        PAGE
--------                                                                    ----
                                     PART I

1. and 2.     Business and Properties....................................      1

       3.     Legal Proceedings..........................................      6

       4.     Submission of Matters to a Vote of Security Holders........     11

                                     PART II

       5.     Market for Registrant's Common Equity, Related Stockholder
               Matters and Issuer Purchases of Equity Securities.........     12

       6.     Selected Financial Data....................................     13

       7.     Management's Discussion and Analysis of Financial Condition
               and Results of Operations.................................     14

       8.     Financial Statements and Supplementary Data................     21

       9.     Changes in and Disagreements with Accountants on Accounting
               and Financial Disclosure..................................     59

      9A.     Controls and Procedures....................................     59

                                    PART III

      10.     Directors and Executive Officers of the Registrant.........     60

      11.     Executive Compensation.....................................     60

      12.     Security Ownership of Certain Beneficial Owners and
               Management................................................     60

      13.     Certain Relationships and Related Transactions.............     60

      14.     Principal Accountant Fees and Services.....................     60

                                     PART IV

      15.     Exhibits and Financial Statement Schedules, and Reports on
               Form 8-K..................................................     61

<PAGE>

                                     PART I

ITEMS 1. AND 2. BUSINESS AND PROPERTIES

                                  INTRODUCTION

        All statements other than statements of historical fact contained in
this report are forward-looking statements. Forward- looking statements in this
report generally are accompanied by words such as "anticipate," "believe,"
"estimate," or "expect" or similar statements. Although the Company believes
that the expectations reflected in such forward-looking statements are
reasonable, no assurance can be given that such expectations will prove correct.
Factors that could cause the Company's results to differ materially from the
results discussed in such forward-looking statements are disclosed in this
report. All forward- looking statements in this Form 10-K are expressly
qualified in their entirety by the cautionary statements in this paragraph.

        References to "the Company" mean Castle Energy Corporation, the parent,
and/or one or more of its subsidiaries. Such references are for convenience only
and are not intended to describe legal relationships.

        From inception (February 1981) until September 2002, the Company
operated in the exploration and production segment of the energy business.
During this period the Company owned interests in oil and gas wells in fourteen
states in the United States and participated in the drilling of five wildcat
wells in Romania. For the periods from inception until August 1989 and from June
1999 to September 6, 2002, the exploration and production segment of the energy
business was the only business in which the Company operated. On May 31, 2002,
the Company sold all of its domestic oil and gas properties to Delta Petroleum
Corporation, another public company engaged in oil and gas exploration and
production ("Delta"). On September 6, 2002, the Company sold all of its
interests in Romania to the operator of its Romanian concession. Prior to these
sales the Company owned interests in approximately 525 oil and gas wells in the
United States and a fifty percent interest in several drilling concessions in
Romania. As a result of these sales, the Company did not directly own any
operating assets from September of 2002 until March 30, 2004. On March 30 and
31, 2004, the Company acquired interests in 166 gas wells in western
Pennsylvania from Delta, another outside party and from several limited
partnerships. The Company operates approximately 130 of the wells.

        During the period from August of 1989 through September 30, 1995, the
Company, through certain subsidiaries, was primarily engaged in petroleum
refining. Indian Refining I Limited Partnership (formerly Indian Refining
Limited Partnership) ("IRLP"), an indirect wholly-owned subsidiary of the
Company, owned the former Texaco Indian Refinery, an 86,000 barrel per day (B/D)
refinery located in Lawrenceville, Illinois ("Indian Refinery"). In addition,
Powerine Oil Company ("Powerine"), a former indirect wholly-owned subsidiary of
the Company, owned and operated a 49,500 B/D refinery located in Santa Fe
Springs, California ("Powerine Refinery"). By September 30, 1995, the Company's
refining subsidiaries had terminated and discontinued all of their refining
operations.

        During the period from December 31, 1992 to May 31, 1999, the Company,
through two of its subsidiaries, was engaged in natural gas marketing and
transmission operations. During this period one of the Company's subsidiaries
sold natural gas to Lone Star Gas Company ("Lone Star") under a long-term gas
sales contract. The subsidiaries also entered into two long- term gas sales
contracts and one long-term gas supply contract with MG Natural Gas Corp.
("MGNG"), a subsidiary of MG Corp. ("MG"), whose parent was Metallgesellschaft
A.G. ("MGAG"), a large German conglomerate. All of the subsidiaries' gas
contracts terminated on May 31, 1999. The Company has not replaced these
contracts because it sold its pipeline assets to a subsidiary of Union Pacific
Resources Corporation ("UPRC") in May 1997 and because it was unable to
negotiate similar profitable long-term contracts since most gas purchasers then
bought gas on the spot market.

        In August 2000, the Company purchased thirty-five percent (35%) of the
membership interests of Networked Energy LLC ("Network") for $500,000. Network
is a private company engaged in the planning, installation and operation of
natural gas fueled energy generating facilities that supply power, heating and
cooling services directly to retail customers with significant energy
consumption to reduce their energy costs - especially during peak usage periods.
In March 2002, the Company invested an additional $150,000 in Network,
increasing its membership interest to 45%. The Company also made a loan to
Network of $125,000 at that time. Network is a start up company which earned its
first revenues during the quarter ended September 30, 2004.

                                       -1-
<PAGE>

        In October 1996, the Company commenced a program to repurchase shares of
its common stock at stock prices beneficial to the Company. As of December 1,
2004, 4,911,020 shares, representing approximately 69% of previously outstanding
shares, had been repurchased and the Company's Board of Directors has authorized
the purchase of up to 356,946 additional shares.

        As of September 30, 2004, the Company's primary assets were as follows:

        a.  $33,742,000 of unrestricted cash.
        b.  7,000,000 common shares of Delta, representing 17.8% of Delta's
            outstanding common shares. Such shares had a market value of
            $91,280,000 based upon the closing price of Delta's common stock on
            September 30, 2004.
        c.  Oil and gas properties with an estimated market value of $9,000,000
            to $12,000,000.
        d.  A 45% membership interest in Network.

        In addition, the Company is involved in three significant lawsuits - see
Item 3 - "Legal Proceedings."

                     OIL AND GAS EXPLORATION AND PRODUCTION

GENERAL

        The Company's significant activities during the five years ended
September 30, 2004 are as follows:

        In December 1999, a subsidiary of the Company purchased majority
interests in twenty-six offshore Louisiana wells from Whiting Petroleum Company
("Whiting"), a public company engaged in oil and gas exploration and
development. The adjusted purchase price was $890,000. In September 2000, the
subsidiary sold its interests in the offshore Louisiana wells to Delta. The
effective date of the sale was July 1, 2000. The adjusted purchase price of
$3,059,000 consisted of $1,122,000 cash plus 382,289 shares of Delta's common
stock valued of $1,937,000 based on the closing market price of Delta on the
closing date of the sale.

        In April 1999, the Company purchased an option to acquire a fifty
percent (50%) interest in three oil and gas concessions granted to a subsidiary
of Costilla Energy Corporation, a public oil and gas exploration and production
company ("Costilla"), by the Romanian government. The Company paid Costilla
$65,000 for the option. In May 1999, the Company exercised the option. By
September 30, 2001, the Company had participated in the drilling of five wildcat
wells in Romania. Four of those wells resulted in dry holes. Although the fifth
well produced some volumes of natural gas when tested, the Company was not able
to obtain a sufficiently high gas price to justify future production. The
Company subsequently agreed to participate in the drilling of a sixth well in
the Black Sea in the spring or early summer of 2002. The drilling of the Black
Sea well was postponed several times because of the lack of suitable drilling
rigs. On September 6, 2002, the Company's subsidiary, which owned a 50% interest
in the Romanian drilling concessions, sold all of its interests in Romania to
the operator of the concessions for $1. As a result, the Company did not
participate in the drilling of the wildcat well in the Black Sea, which, the
Company was informed, resulted in a dry hole.

        On April 30, 2001, the Company consummated the purchase of several East
Texas oil and gas properties from a private company. The effective date of the
purchase was April 1, 2001. These properties included majority interests in
twenty-one (21) operated producing oil and gas wells and interests in
approximately 6,500 gross acres in three counties in East Texas. The Company
estimated the proved reserves acquired to be approximately 12.5 billion cubic
feet of natural gas and 191,000 barrels of crude oil. The consideration paid,
net of purchase price adjustments, was $10,040,000. The Company used its own
internally generated funds to make the purchase.

        On May 31, 2002, the Company consummated the sale of all of its domestic
oil and gas properties to Delta. The sale was pursuant to a definitive purchase
and sale agreement dated January 15, 2002. At closing, the Company received
$18,236,000 cash plus 9,566,000 shares of Delta's common stock. The $18,236,000
cash represented a $20,000,000 purchase price cash component as of October 1,
2001, the effective date of the sale, less $1,764,000 of net cash flow received
by the Company applicable to production from the properties subsequent to the
effective date. In September 2002, the Company paid Delta $194,000 as a final
purchase price adjustment, effectively reducing the cash portion of the sale to
$18,042,000. Pursuant to the governing purchase and sale agreement the Company
granted Delta an option to repurchase up to 3,188,667 of Delta's shares at
$4.50/share through May 31, 2003. Delta's option expired unexercised on May 31,
2003.

        The Company owned no oil and gas properties from September 6, 2003 until
March 30, 2004.

                                       -2-
<PAGE>

        On March 31, 2004, the Company acquired interests in 138 western
Pennsylvania gas wells from Delta. The Company previously owned most of these
properties through May 31, 2002 when it sold all of its United States oil and
gas properties to Delta. The purchase price paid by the Company was $8,121,000
consisting of $8,000,000 for the agreed-upon purchase price as of January 1,
2004 plus $121,000 of net expenses paid by Delta applicable to the period
January 1, 2004 to March 31, 2004. The effective date of the purchase was
January 1, 2004.

        At the same time the Company also purchased another owner's interests in
the same gas properties for $334,000. The other owner's interests in the
properties were approximately four percent of Delta's interests in the same
properties.

        On March 30, 2004, the Company acquired interests in 28 western
Pennsylvania gas wells for $1,100,000 from five limited partnerships.

        The final purchase price for all three gas property acquisitions was
approximately $9,000,000 after giving effect to all purchase price adjustments
and excluding $222,000 of related asset retirement obligations.

        The Company's petroleum reservoir engineer has estimated the proved
reserves applicable to the three purchases to be approximately eight billion
cubic feet of natural gas, of which approximately 87% represents proved
producing reserves, while the remaining 13% represents behind pipe and
undeveloped reserves. Approximately 130 of 166 wells in which the Company
acquired interests are operated by the Company.

PROPERTIES

        Proved Oil and Gas Reserves

        The following is a summary of the Company's oil and gas reserves as of
September 30, 2004. All estimates of reserves are based upon engineering
evaluations prepared by the Company's independent petroleum reservoir engineers,
Ralph E. Davis Associates, Inc., in accordance with the requirements of the
Securities and Exchange Commission. Such estimates include only proved reserves.
The Company reports its reserves annually to the Department of Energy. The
Company's estimated reserves as of September 30, 2004 were as follows:

        NET MCF (1) OF GAS:

            Proved developed ..................   8,081,000
            Proved undeveloped ................     804,000
                                                  ---------
            Total .............................   8,885,000
                                                  =========

----------
        (1) Thousand cubic feet

        Since the Company sold all of its oil and gas properties by September
30, 2002 and did not reacquire any gas properties until March 30, 2004, the
Company did not directly own any oil and gas reserves at September 30, 2002 or
September 30, 2003.

        In addition, proven oil and gas reserves can be indirectly attributed to
the Company by virtue of the Company's ownership of Delta, which was 17.8% at
September 30, 2004. Such reserves are included in the unaudited reserve
disclosures in Note 10 to the consolidated financial statement included in
Item 8 of this Form 10-K.

        Oil and Gas Production

        The following table summarizes the net quantities of oil and gas
production of the Company for each of the three fiscal years in the period ended
September 30, 2004, including production from acquired properties since the date
of acquisition.

<TABLE>
<CAPTION>
                                                        FISCAL YEAR ENDED SEPTEMBER 30,
                                                       ---------------------------------
                                                         2004         2003        2002
                                                       ---------   ---------   ---------
        <S>                                              <C>               <C> <C>
        Oil -- Bbls (barrels) ......................           0           0     179,000
        Gas -- MCF (thousand cubic feet) ...........     156,000           0   2,254,000
</TABLE>

                                       -3-
<PAGE>

        Production for the year ended September 30, 2002 only includes
production for the period October 1, 2001 to May 31, 2002 since the Company sold
all of its producing properties to Delta on May 31, 2002. Production for the
year ended September 30, 2004 only includes production from March 30, 2004 to
September 30, 2004 since the Company owned no oil and gas properties from
October 1, 2003 to March 30, 2004.

        Average Sales Price and Production Cost Per Unit

        The following table sets forth the average sales price per barrel of oil
and MCF of gas produced by the Company, including hedging adjustments, if
applicable, and the average production cost (lifting cost) per equivalent unit
of production for the periods indicated. Production costs include applicable
operating costs and maintenance costs of support equipment and facilities,
labor, repairs, severance taxes, property taxes, insurance, materials, supplies
and fuel consumed in operating the wells and related equipment and facilities.

<TABLE>
<CAPTION>
                                                              FISCAL YEAR ENDED SEPTEMBER 30,
                                                             ---------------------------------
                                                                2004        2003       2002
                                                             ---------   ---------   ---------
        <S>                                                  <C>               <C>   <C>
        Average Sales Price per Barrel of Oil ............         N/A         N/A   $   21.51
        Average Sales Price per MCF of Gas ...............   $    6.96         N/A   $    2.48
        Average Production Cost per Equivalent MCF(1) ....   $    2.02         N/A   $     .98
</TABLE>

----------
        (1) For purposes of equivalency of units, a barrel of oil is assumed
            equal to six MCF of gas, based upon relative energy content.

        No production was hedged in fiscal 2004 or fiscal 2002.

        No sale price or production cost data are included in the above data for
the period June 1, 2002 to March 30, 2004 because the Company sold all of its
producing oil and gas properties to Delta on May 31, 2002 and did not acquire
gas properties until March 30, 2004.

        Production Wells and Acreage

        The following table presents the oil and gas properties in which the
Company held an interest as of September 30, 2004. The wells and acreage owned
by a subsidiary of the Company are located in Pennsylvania.

                                                                    AS OF
                                                              SEPTEMBER 30, 2004
                                                             -------------------
                                                             GROSS(2)    Net (3)
                                                             --------   --------
        PRODUCTIVE WELLS:(1)
        Gas Wells ........................................        166        127
        Oil Wells ........................................          0          0

        ACREAGE:
        Developed Acreage ................................      5,680      3,644
        Undeveloped Acreage ..............................      1,002        800

----------
        (1) A "productive well" is a producing well or a well capable of
            production.
        (2) A gross well or acre is a well or acre in which a working interest
            is owned. The number of gross wells is the total number of wells in
            which a working interest is owned.
        (3) A net well or acre is deemed to exist when the sum of fractional
            working interests owned in gross wells or acres equals one. The
            number of net wells or acres is the sum of the fractional working
            interests owned in gross wells or acres.

        The Company owned no wells or acreage at September 30, 2003 or
September 30, 2002.

                                       -4-
<PAGE>

        Drilling Activity

        The table below sets forth for each of the three fiscal years in the
period ended September 30, 2004 the number of gross and net productive and dry
developmental and exploratory wells drilled, including wells drilled on acquired
properties since the dates of acquisition.

<TABLE>
<CAPTION>
                                                           FISCAL YEAR ENDED SEPTEMBER 30,
                   ---------------------------------------------------------------------------------------------------------------
                                   2004                                  2003                                  2002
                   -----------------------------------   -----------------------------------   -----------------------------------
                     UNITED STATES         ROMANIA         UNITED STATES         ROMANIA         UNITED STATES         ROMANIA
                   ----------------   ----------------   ----------------   ----------------   ----------------   ----------------
                   PRODUCTIVE   DRY   PRODUCTIVE   DRY   PRODUCTIVE   DRY   PRODUCTIVE   DRY   PRODUCTIVE   DRY   PRODUCTIVE   DRY
                   ----------   ---   ----------   ---   ----------   ---   ----------   ---   ----------   ---   ----------   ---
<S>                        <C>   <C>          <C>   <C>          <C>   <C>          <C>   <C>          <C>   <C>          <C>   <C>
DEVELOPMENTAL:
   Gross .......           --    --           --    --           --    --           --    --           --     2           --    --
   Net .........           --    --           --    --           --    --           --    --           --     1           --    --

EXPLORATORY:
   Gross .......           --    --           --    --           --    --           --    --           --    --           --    --
   Net .........           --    --           --    --           --    --           --    --           --    --           --    --
</TABLE>

        The Company has not participated in the drilling of any wells since it
sold all of its domestic oil and gas properties to Delta in May 2002.

                                   REGULATIONS

        The oil and gas exploration and production operations of the Company
were subject to a number of local, state and federal environmental laws and
regulations. Compliance with such regulations did not result in material
expenditures.

        Most states in which the Company conducted oil and gas exploration and
production activities have laws regulating the production and sale of oil and
gas. Such laws and regulations generally are intended to prevent waste of oil
and gas and to protect correlative rights and opportunities to produce oil and
gas between owners of interests in a common reservoir. Most states also have
regulations requiring permits for the drilling of wells and regulations
governing the method of drilling, casing and operating wells, the surface use
and restoration of properties upon which wells are drilled and the plugging and
abandonment of wells. In recent years there has been a significant increase in
the amount of state regulation, including increased bonding, plugging and
operational requirements. Such increased state regulation resulted in increased
legal and compliance costs to the Company.

        The Company is subject to various local, state and Federal laws
regarding environmental and ecological matters because it acquired and now
operates gas properties. To alleviate the environmental risk, the Company
carries $5,000,000 of liability insurance. The costs of such liability insurance
have increased significantly recently. Although the Company believes that the
insurance it carries is adequate, such may not be the case given increased
litigiousness generally.

        Since the Company's subsidiaries have disposed of their refineries and
third parties have assumed environmental liabilities associated with the
refineries, the Company's current activities are not subject to environmental
regulations that generally pertain to refineries, e.g., the generation,
treatment, storage, transportation and disposal of hazardous wastes, the
discharge of pollutants into the air and water and other environmental laws.
Nevertheless, the Company has both contingent and litigated environmental
exposures with respect to its subsidiaries' historic refining operations. See
Items 3 and 7 of this Form 10-K and Note 14 to the consolidated financial
statements included in Item 8 of this Form 10-K.

                         EMPLOYEES AND OFFICE FACILITIES

        As of December 1, 2004, the Company and one of its subsidiaries employed
eleven personnel.

        The Company leases certain offices as follows:

        OFFICE LOCATION                      FUNCTION
        ----------------------------         ------------------------------
        King of Prussia, PA                  Corporate Headquarters
        Blue Bell, PA                        Accounting and Administration
        Oklahoma City, Oklahoma              Legal

                                       -5-
<PAGE>

        The leases governing the Company's offices include standard provisions
for fixed rentals plus reimbursement of allocated shares of utility costs
(minor) and the right to sublease subject to landlord approval. The last office
lease expires in December 2008. The lease commitments of the Company are set
forth in Note 15 to the Consolidated Financial Statements in Item 8 to this
Form 10-K.

ITEM 3. LEGAL PROCEEDINGS

        ENVIRONMENTAL LIABILITIES/LITIGATION

        ChevronTexaco Litigation

        On August 13, 2002, three subsidiaries of ChevronTexaco filed
Cause No. 02-4162-JPG in the United States District Court for the Southern
District of Illinois against the Company, as well as against two inactive
subsidiaries of the Company and three unrelated parties. The lawsuit seeks
damages and declaratory relief under contractual and statutory claims arising
from environmental damage at the now dismantled Indian Refinery. In particular,
the lawsuit claims that the Company is contractually obligated to indemnify and
defend ChevronTexaco against all liability and costs, including lawsuits, claims
and administrative actions initiated by the United States Environmental
Protection Agency ("EPA") and others, that ChevronTexaco has incurred or will
incur as a result of environmental contamination at and around the Indian
Refinery, even if that environmental contamination was caused by Texaco, Inc.
and its present and former subsidiaries ("Texaco" - now merged into
ChevronTexaco) which previously owned the refinery for over 75 years. The suit
also seeks costs, damages and declaratory relief against the Company under the
Federal Comprehensive Environmental Response Compensation Liability Act
("CERCLA"), the Oil Pollution Act of 1990 ("OPA") and the Solid Waste Disposal
Act, as amended, ("RCRA").

        History

        In December 1995, Indian Refining Limited Partnership, an inactive
refining subsidiary of the Company ("IRLP") sold its refinery, the Indian
Refinery, to American Western Refining L.P. ("American Western"), an
unaffiliated party. As part of the related purchase and sale agreement, American
Western assumed all environmental liabilities and indemnified IRLP with respect
thereto. Subsequently, American Western filed for bankruptcy and sold large
portions of the Indian Refinery to an outside party pursuant to a bankruptcy
proceeding. The outside party has substantially dismantled the Indian Refinery.
American Western filed a liquidation plan in 2001. American Western anticipated
that the liquidation plan would be confirmed in January 2002 but confirmation
was delayed primarily because of legal challenges by Texaco, and subsequently
ChevronTexaco. American Western's liquidation plan was confirmed in April 2003.
In the plan, IRLP reduced a $5,400,000 secured claim against American Western to
$800,000. In exchange the EPA and Illinois EPA entered into an Agreement and
Covenant Not to Sue with IRLP, which extinguished all CERCLA claims against
IRLP. Under the American Western liquidation plan, IRLP received $599,000 which
it is currently distributing to its creditors.

        During fiscal 1998, the Company was informed that the EPA had
investigated offsite acid sludge waste found near the Indian Refinery and had
investigated and remediated surface contamination on the Indian Refinery
property. Neither the Company nor IRLP was initially named with respect to these
two actions.

        In October 1998, the EPA named the Company and two of its inactive
refining subsidiaries as potentially responsible parties for the expected
clean-up of an area of approximately 1,000 acres, which the EPA later designated
as the Indian Refinery-Texaco Lawrenceville Superfund Site. In addition,
eighteen other parties were named including Texaco and a subsidiary of Texaco
which had owned the refinery until December of 1988. The Company subsequently
responded to the EPA indicating that it was neither the owner nor the operator
of the Indian Refinery and thus not responsible for its remediation.

        In November 1999, the Company received a request for information from
the EPA concerning the Company's involvement in the ownership and operation of
the Indian Refinery. The Company responded to the EPA information request in
January 2000.

            Claims by Texaco

            On August 7, 2000, the Company received notice of a claim against it
and two of its inactive refining subsidiaries from Texaco. Texaco had made no
previous claims against the Company although the Company's subsidiaries had
owned the refinery from August 1989 until December 1995. In its claim, Texaco
demanded that the Company and its former subsidiaries indemnify Texaco for all
liability resulting from environmental contamination at and around the Indian
Refinery. In addition, Texaco demanded that the Company assume Texaco's defense
in all matters relating to environmental contamination at and

                                       -6-

<PAGE>

around the Indian Refinery, including lawsuits, claims and administrative
actions initiated by the EPA, and indemnify Texaco for costs that Texaco had
already incurred addressing environmental contamination at the Indian Refinery.
Finally, Texaco also claimed that the Company and two of its inactive
subsidiaries were liable to Texaco under the CERCLA as owners and operators of
the Indian Refinery. The Company responded to Texaco disputing the factual and
legal contentions for Texaco's claims against the Company. The Company's
management and special counsel subsequently met with representatives of Texaco
but the parties disagreed concerning Texaco's claims. In October 2001, Texaco
merged with Chevron and the merged company was named ChevronTexaco.

            In May 2002, the Company received a letter from ChevronTexaco which
asserted a new claim against the Company and its subsidiaries pursuant to OPA
for costs and damages incurred or to be incurred by ChevronTexaco resulting from
actual or threatened discharges of oil to navigable waters at or near the Indian
Refinery. ChevronTexaco estimated these costs and damages to be $20,500,000.

            The Company subsequently corresponded with ChevronTexaco and
voluntarily provided a number of documents requested by ChevronTexaco. In June
2002, ChevronTexaco indicated to the Company that ChevronTexaco did not intend
to sue the Company. Subsequently, ChevronTexaco requested additional documents
from the Company, which the Company promptly and voluntarily again supplied to
ChevronTexaco.

            In August 2002, the Company's management and special counsel met
with legal and management representatives of ChevronTexaco in an effort to
resolve outstanding issues. At the meeting a special outside counsel of
ChevronTexaco asserted claims against the Company based upon newly expressed
legal theories. ChevronTexaco also informed the Company that residential
landowners adjacent to the Indian Refinery site had recently filed a toxic torts
suit against ChevronTexaco in Illinois state court. The meeting ended in an
impasse.

            Litigation

            On August 13, 2002, ChevronTexaco filed the above litigation in
federal court. By letter dated August 28, 2002, ChevronTexaco tendered the
Illinois state court litigation to the Company for indemnification, but the
Company promptly responded, denying responsibility. Following the initiation of
litigation the Company retained Bryan Cave LLP as trial counsel.

            On October 25, 2002, the Company filed motions to dismiss as a
matter of law the contractual claims in Texaco's complaint, as well as the OPA
and RCRA claims. At the same time, the Company filed its answer to
ChevronTexaco's lawsuit on the remaining CERCLA claim. A pre-trial scheduling
conference was held May 5, 2003 and on May 8, 2003 two unrelated defendants were
dismissed from the case with prejudice under a stipulation with ChevronTexaco on
undisclosed terms. On June 2, 2003, the Federal District Court denied the
Company's motions to dismiss, following which, on July 9, 2003, the Company
filed answers to the contractual, OPA and RCRA claims. The parties are currently
conducting discovery and depositions. The Company is awaiting a rescheduling of
the presumptive trial date for this case from the Federal District Court caused
by the court's crowded criminal docket. The Company expects to pursue motions
for summary judgment prior to trial.

            The central argument to both ChevronTexaco's contractual and
statutory claims is that the Company should be treated as a "successor" and
"alter ego" of certain of its present and former subsidiaries, and thereby
should be held directly liable for ChevronTexaco's claims against those
entities. ChevronTexaco makes this argument notwithstanding the fact that the
Company never directly owned the refinery and never was a party to any of the
disputed contracts. ChevronTexaco has also claimed that the Company itself
directly operated the refinery. The leading opinion in this area of the law, as
issued by the U.S. Supreme Court in June 1998 in the comparable matter of United
States v. Bestfoods, 524 U.S. 51, 118 S.Ct. 1876 (1998), supports the Company's
positions.

            Estimated gross undiscounted clean-up costs for this refinery are at
least $80,000,000-$150,000,000 according to public statements by Texaco to the
Company and third parties. In January 2003, the United States and the State of
Illinois filed a motion in the American Western bankruptcy case which stated
that the estimated total response costs for one portion of the site alone could
range from $109,000,000 to $205,000,000. ChevronTexaco has asserted in its
contractual claim that the Company should indemnify ChevronTexaco for all
environmental liabilities related to the Indian Refinery. If ChevronTexaco were
to prevail on this theory, the Company could be held liable for the entirety of
the estimated clean up costs, a sum far in excess of the Company's financial
capability. On the other hand, if the Company were found liable by reason of
ChevronTexaco's statutory claims for contribution and reimbursement under CERCLA
and/or OPA, the Company could be required to pay a percentage of the clean-up
costs based on equitable allocation factors such as comparative time of
ownership and operation, toxicity and amount of hazardous materials released,
remediation funded to date, as well as other factors. Since

                                       -7-
<PAGE>

the Company's subsidiary only operated the Indian Refinery five years, whereas
Texaco operated it over seventy-five years, the Company would expect that its
share of remediation liability would at a minimum be reduced to an amount
proportional to the years of operation by its subsidiary, although such may not
be the case. Additionally, since Texaco and its subsidiaries intentionally
disposed of hazardous wastes on site at the Indian Refinery while the Company's
subsidiary arranged to remove for offsite destruction and disposal any hazardous
wastes it may have generated, any allocation to the Company and/or its
subsidiaries might be further reduced.

            The Company and its special counsel, Reed Smith LLP, do not consider
an unfavorable outcome for the Company in ChevronTexaco's lawsuit to be probable
and the Company intends to vigorously defend itself against all of
ChevronTexaco's claims in the litigation and any lawsuits that may follow. In
addition to the numerous defenses that the Company has against ChevronTexaco's
contractual claim for indemnity, the Company and its special counsel believe
that by the express language of the agreement which ChevronTexaco construes to
create an indemnity, ChevronTexaco has irrevocably elected to forego all rights
of contractual indemnification it might otherwise have had against the Company.

            Contingent Environmental Liabilities

            Although the Company does not believe it is liable for any of its
subsidiaries' clean-up costs and intends to vigorously defend itself in such
regard, the Company cannot predict the ultimate outcome or timing of these
matters due to inherent uncertainties. If funds for environmental clean-up are
not provided by former and/or present owners, it is possible that the Company
and/or one of its former refining subsidiaries could be held responsible or
could be named parties in additional legal actions to recover remediation costs.
In recent years, government and other plaintiffs have often sought redress for
environmental liabilities from the party most capable of payment without regard
to responsibility or fault.

            Although any environmental liabilities related to the Indian
Refinery have been transferred to others, there can be no assurance that the
parties assuming such liabilities will be able to pay them. American Western,
owner of the Indian Refinery, filed for bankruptcy and is in the process of
liquidation.

            As noted above, the EPA named the Company as a potentially
responsible party for remediation of the Indian Refinery and requested and
received relevant information from the Company and ChevronTexaco has tendered
the defense of a state court toxic torts action to the Company. Whether or not
the Company is ultimately held liable in the current litigation or other
proceedings, it is probable that the Company will incur substantial legal fees
and experience a diversion of corporate resources from other opportunities.

        OTHER LITIGATION

            Long Trusts Lawsuit

            In November 2000, the Company and three of its subsidiaries were
defendants in a jury trial in Rusk County, Texas. The plaintiffs in the case,
the Long Trusts, are non-operating working interest owners in certain wells
previously operated by Castle Texas Production Limited Partnership ("CTPLP"), an
inactive exploration and production subsidiary of the Company. The wells were
among those sold to UPRC in May 1997. The Long Trusts claimed that CTPLP did not
allow them to sell gas from March 1, 1996 to January 31, 1997 as required by
applicable joint operating agreements, and they sued CTPLP and the Company's
other subsidiaries, claiming (among other things) breach of contract, breach of
fiduciary duty, conversion and conspiracy. The Long Trusts sought actual
damages, exemplary damages, prejudgment and post-judgment interest, attorney's
fees and court costs. CTPLP counterclaimed for approximately $150,000 of unpaid
joint interest billings plus interest, attorney's fees and court costs.

            After a three-week trial, the District Court in Rusk County
submitted 36 questions to the jury which covered the claims and counterclaim in
the lawsuit. Based upon the jury's answers, the District Court entered judgment
on some of the Long Trusts' claims against the Company and its subsidiaries, as
well as CTPLP's counterclaim against the Long Trusts. The District Court issued
an amended judgment on September 5, 2001 which became final December 19, 2001.
The net amount awarded to the plaintiffs was approximately $2,700,000.

            The Company and its subsidiaries and the Long Trusts subsequently
filed notices of appeal, submitted legal briefs in April 2002, reply briefs in
June and July 2002, and ultimately argued the case before the 12th Court of
Appeals in Tyler, Texas in October 2002. On July 31, 2003, that court reversed
and remanded in part the trial court's judgment against the Company and its
subsidiaries while affirming the judgment against the Long Trusts which had
awarded damages on the counterclaim asserted by CTPLP. In its decision, the
appellate court held that the trial court had submitted erroneous theories

                                       -8-
<PAGE>

to the jury, expressly rejecting the Long Trusts' claims for breach of fiduciary
duty, conversion, implied covenants and exemplary damages. It also remanded the
Long Trusts' claims for breach of contract to the district court for retrial.
The appellate court upheld the trial court's award to CTPLP on its counterclaim
for approximately $150,000 of unpaid joint interests billings, $450,000 in
attorneys' fees, plus interest and court costs. Both the Company and its
subsidiaries and the Long Trusts thereafter submitted motions for a rehearing on
certain rulings to the 12th Court of Appeals. That court denied both motions for
a rehearing.

            The Long Trusts subsequently filed a petition for review with the
Supreme Court of Texas. On March 26, 2004, the Texas Supreme Court denied the
Long Trusts petition for review and the Long Trusts filed a petition for
rehearing with that court two weeks later. That petition was also subsequently
denied, whereupon the Court of Appeals issued its mandate on June 9, 2004,
completing the appellate process. Certain breach of contract claims by the Long
Trusts which were reversed and remanded by the appellate court may be retried by
the plaintiffs. The trial court has set March 15, 2005 as the trial date for
retrial of the breach of contract claims asserted by the Long Trusts. Based on
the evidence at the initial trial coupled with the guidance to the trial court
given in the appellate decision, the Company believes that it will be able to
prove that there was no breach of contract and that Long Trusts suffered no
damages, and that any such breach of contract claims, even if decided adversely
to the Company, will not result in a material loss to the Company.

            Pursuant to the mandate of the Texas Court of Appeals, the Company
has now moved to sever CTPLP's claims against the Long Trusts from any retrial
of the Long Trust's contract claims against the Company and to collect on
CTPLP's judgment against the Long Trusts which is secured by a letter of credit
posted by the Long Trusts with the trial court. The Company estimates the
judgment to be approximately $1,000,000, including accrued interest, as of
September 30, 2004. On September 17, 2004, the Long Trusts filed a motion for
clarification with the Court of Appeals which in essence sought to reverse that
court's severance of CTPLP's claims from the retrial of the Long Trusts' breach
of contract claims. The Company has opposed the Long Trusts' motion on a number
of grounds and believes that it has no merit.

            To pursue its appeal the Company and its subsidiaries were required
to post a bond to cover the gross amount of damages awarded to the Long Trusts,
including interest and attorneys' fees and to maintain that bond. The Company
secured that bond with a letter of credit. Upon issue of the mandate by the
Texas Court of Appeals, the Company's $3,886,000 supersedeas bond was released
under Texas law. The Company's $4,110,000 letter of credit, including accrued
interest, securing that bond was also released and those funds are no longer
restricted cash. The Company has not accrued any recoveries for this litigation
as of September 30, 2004, but will record recoveries if and when they are
ultimately realized (collected).

            Pilgreen Litigation

            As part of the oil and gas properties acquired from AmBrit Energy
Corporation ("AmBrit") in June 1999, Castle Exploration Company, Inc., a
wholly-owned subsidiary of the Company ("CECI") acquired a 10.65% overriding
royalty interest ("ORRI") in the Simpson lease in south Texas, including the
Pilgreen #2ST gas well. CECI subsequently transferred that interest to Castle
Texas Oil and Gas Limited Partnership ("CTOGLP"), an indirect wholly-owned
subsidiary. Because the operator suspended revenue attributable to the ORRI from
first production due to title disputes, AmBrit, the previous owner, filed claims
against the operator of the Pilgreen well, and CTOGLP acquired rights in that
litigation with respect to the period after January 1, 1999. In August 2002,
$282,000 was released to the Company of which $249,000 was recorded as income by
the Company and the remaining $33,000 paid to Delta. Because of a claim by
Dominion Oklahoma Texas Exploration and Production, Inc. ("Dominion") (see
below), a working interest owner in the same well, that CTOGLP's ORRI in the
Simpson lease should be deemed burdened by 3.55% overriding royalty interest,
there is still a title dispute as to approximately $120,000 of suspended CTOGLP
Pilgreen #2ST production proceeds for the Company's account. (The Company sold
all of its oil and gas assets, including the Pilgreen #2ST well, to Delta on May
31, 2002 but effective as of October 1, 2001.) The Company has named Dominion as
a defendant in a legal action seeking a declaratory judgment that the Company is
entitled to its full 10.65% overriding royalty interest in the Pilgreen well.
The Company believes that Dominion's title exception to CTOGLP's overriding
royalty interest is erroneous and notes that several previous title opinions
have confirmed the validity of CTOGLP's interest. The litigation is related to
the Dominion litigation (see below). Accordingly, the Company believes that
CTOGLP will prevail in this litigation if CTOGLP prevails in the Dominion
Litigation or that CTOGLP will fail in this litigation if it fails in the
Dominion Litigation. Since the Company has not recorded any revenue related to
the $120,000 of suspended revenue, it expects to record $120,000 of revenue if
it prevails, but no expense if it fails in this litigation. Dominion has filed a
motion for summary judgment but the trial court ordered a continuance of that
motion until a final opinion is issued by the appellate court in the Dominion
matter, described below, since the controversies are fundamentally similar.

                                       -9-
<PAGE>

            CTOGLP, along with several unrelated parties, has also filed suit to
collect production proceeds from an additional well on the Simpson lease in
which CTOLGP had a 5.325% overriding royalty interest suspended by the operator
because of title disputes. The Company intends to contest this matter
vigorously. At the present time, the amount held in escrow applicable to the
additional well attributable to the Company's interest is approximately $66,000,
although approximately $22,000 of that amount would be subject to Dominion's
claims in the Pilgreen Litigation. The Company has not recorded any of the
$66,000 of suspended revenue as income but will record it as income when and if
it is realized (collected).

            Dominion Litigation

            On March 18, 2002, Dominion, operator of the Mitchell and
Migl-Mitchell wells in the Southwest Speaks field in south Texas and a working
interest owner in the Pilgreen #2ST well, filed suit in Texas against CTOGLP
seeking declaratory judgment in a title action that the overriding royalty
interest held by CTOGLP in these wells should be deemed to be burdened by
certain other overriding royalty interests aggregating 3.55% and should
therefore be reduced from 10.65% to 7.10%. Dominion is also seeking an
accounting and refund of payments for overriding royalty to CTOGLP in excess of
the 7.10% since April 2000. The Company currently estimates the amount in
controversy to be approximately $781,000. Dominion threatened to suspend all
revenue payable to the Company from the Mitchell and Migl-Mitchell to offset its
claim. The Company and Dominion subsequently examined the land and lease
documents concerning the overriding royalty interests. The Company believes that
Dominion's title exception to CTOGLP's overriding royalty interest is erroneous
and notes that several previous title opinions have confirmed the validity of
CTOGLP's interest.

            In July 2003, Dominion filed a motion for partial summary judgment
concerning the Company's claim that it had assumed the liabilities of its
predecessor in interest and CTOGLP filed its response to Dominion's motion as
well as its own cross motion for partial summary judgment. In September 2003,
the District Court of Lavaca County granted Dominion's partial motion for
partial summary judgment. In January 2004, Dominion filed a motion for final
summary judgment on this matter to which CTOGLP and the other defendants filed a
response. In May 2004, the District Court of Lavaca County granted Dominion's
motion for final summary judgment. The Company has filed an appeal of both the
District Court's summary judgments with the Court of Appeals in Corpus Christi
and both sides have filed briefs.

            At June 30, 2004, the Company accrued a provision of $825,000
related to this litigation, including $44,000 in estimated interest and other
anticipated costs.

                                      -10-
<PAGE>

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        The Company did not hold a meeting of stockholders or otherwise submit
any matter to a vote of stockholders during the fourth quarter of fiscal 2004.

                                      -11-
<PAGE>

                                     PART II

ITEM 5.  MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES

PRINCIPAL MARKET

        The Company's Common Stock is quoted on the Nasdaq National Market
("NNM") under the trading symbol "CECX."

STOCK PRICE AND DIVIDEND INFORMATION

        Stock Price:

        The table below presents the high and low sales prices of the Company's
Common Stock as reported by the NNM for each of the quarters during the two
fiscal years ended September 30, 2004.

                                                  2004                2003
                                           -----------------   -----------------
                                            HIGH       LOW      HIGH       LOW
                                           -------   -------   -------   -------
        First Quarter (December 31) ....   $  7.50   $  5.22   $  4.35   $  3.65
        Second Quarter (March 31) ......   $ 10.50   $  7.25   $  4.00   $  2.98
        Third Quarter (June 30) ........   $ 14.00   $  9.04   $  4.95   $  3.10
        Fourth Quarter (September 30) ..   $ 15.40   $  9.81   $  5.95   $  4.50

        The final sale of the Company's Common Stock as reported by the NNM on
December 1, 2004 was at $12.79.

        Dividends:

        On June 30, 1997, the Company's Board of Directors adopted a policy of
paying regular quarterly cash dividends of $.05 per share on the Company's
common stock. Commencing July 15, 1997, dividends have been paid quarterly
except for the quarter ended June 30, 2002. As with any company, the declaration
and payment of future dividends are subject to the discretion of the Company's
Board of Directors and will depend on various factors.

APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK

        As of December 1, 2004, the Company's Common Stock was held by
approximately 3,000 stockholders.

EQUITY COMPENSATION PLANS OF THE COMPANY

        Information with respect to outstanding options to acquire the Company's
stock pursuant to equity compensation plans of the Company as of September 30,
2004 is as follows:

<TABLE>
<CAPTION>
                                                                       NUMBER OF           WEIGHTED          NUMBER OF
                                                                       SECURITIES           AVERAGE          SECURITIES
                                                                      TO BE ISSUED         EXERCISE          REMAINING
                                                                      UPON EXERCISE        PRICE OF          AVAILABLE
                                                                     OF OUTSTANDING       OUTSTANDING           FOR
                                                                        OPTIONS,            OPTIONS,          ISSUANCE
                                                                        WARRANTS            WARRANTS           UNDER
                                                                       AND RIGHTS         AND RIGHTS       EQUITY PLAN (1)
                                                                    ----------------   ----------------   ----------------
        <S>                                                                  <C>       <C>                       <C>
        Equity compensation plans approved by security holders ..            375,000   $           6.11          1,312,500
        Equity compensation plans not approved by security
         holders ................................................             60,000   $           3.79
                                                                    ----------------                      ----------------
        Total ...................................................            435,000   $           5.79          1,312,500
                                                                    ================                      ================
</TABLE>

        (1) Excludes shares subject to outstanding options, warrants and rights.

                                      -12-
<PAGE>

        The Company's 1992 Equity Incentive Plan was approved by stockholders
and adopted by the Company in 1993. The other options issued were not pursuant
to any plan. (See Note 18 to the consolidated financial statements included in
Item 8 of this Form 10-K.)

ITEM 6.  SELECTED FINANCIAL DATA

        During the five fiscal years ended September 30, 2004 the Company
consummated a number of transactions affecting the comparability of the
financial information set forth below. See Note 4 to the Company's Consolidated
Financial Statements included in Item 8 of this Form 10-K.

        The following selected financial data have been derived from the
Consolidated Financial Statements of the Company for each of the five years
ended September 30, 2004 The information should be read in conjunction with the
Consolidated Financial Statements and notes thereto included in Item 8 of this
Form 10-K.

<TABLE>
<CAPTION>
                                                                        FOR THE FISCAL YEAR ENDED SEPTEMBER 30,
                                                            -----------------------------------------------------------
                                                               2004        2003         2002         2001        2000
                                                            ---------   ---------    ---------    ---------   ---------
                                                                       (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                                         <C>         <C>          <C>          <C>         <C>
Net sales:
  Exploration and production ............................   $   1,087                $   9,445    $  21,144   $  17,959
Gross Margin:
  Exploration and production (oil and gas sales less
   production expenses) .................................   $     772                $   6,178    $  13,745   $  11,765
Income (loss) from continuing operations ................   $  13,620   $  (2,001)   $  (1,844)   $   1,716   $   5,069
Net income (loss) .......................................   $  13,620   $  (2,001)   $  (1,844)   $   1,716   $   5,069
Income (loss) per common share:
  Basic .................................................   $    2.04   $    (.30)   $    (.28)   $     .26   $     .73
  Diluted ...............................................   $    1.96   $    (.30)   $    (.28)   $     .25   $     .71
Dividends declared per common share outstanding .........   $     .20   $     .20    $     .15    $     .20   $     .20
</TABLE>

<TABLE>
<CAPTION>
                                                                                   SEPTEMBER 30,
                                                            -----------------------------------------------------------
                                                               2004        2003         2002         2001        2000
                                                            ---------   ---------    ---------    ---------   ---------
<S>                                                         <C>         <C>          <C>          <C>         <C>
Total assets ............................................   $  83,826   $  49,808    $  51,941    $  59,118   $  63,295
Long-term obligations ...................................   $     246           0            0            0           0
Redeemable preferred stock ..............................           0           0            0            0           0
Capital leases ..........................................           0           0            0            0           0
</TABLE>

                                      -13-
<PAGE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

              ("$000'S" OMITTED EXCEPT SHARE AND PER UNIT AMOUNTS)

RESULTS OF OPERATIONS

GENERAL

        All statements other than statements of historical fact contained in
this report are forward-looking statements. Forward- looking statements in this
report generally are accompanied by words such as "anticipate," "believe,"
"estimate," or "expect" or similar statements. Although the Company believes
that the expectations reflected in such forward-looking statements are
reasonable, no assurance can be given that such expectations will prove correct.
Factors that could cause the Company's results to differ materially from the
results discussed in such forward-looking statements are discussed below. All
forward-looking statements in this Form 10-K are expressly qualified in their
entirety by the cautionary statements in this paragraph.

        During the period from August 1989 to September 30, 1995, two of the
Company's subsidiaries conducted refining operations. By December 12, 1995, the
Company's refining subsidiaries had sold all of their refining assets. In
addition, Powerine merged into another company and was no longer a subsidiary of
the Company. The Company's other refining subsidiaries own no refining assets
and are in the process of liquidation. As a result, the Company accounted for
its refining operations as discontinued operations in the Company's consolidated
financial statements as of September 30, 1995 and retroactively. Accordingly,
discussion of results of refining operations has been confined to the
anticipated impact, if any, of liquidation of the Company's remaining inactive
refining subsidiaries and contingent environmental liabilities of the Company
and its refining subsidiaries.

        Since November 1996, the Company has reacquired 4,911,020 shares or
approximately 69% of its previously outstanding common stock (after taking into
account a three-for-one stock split in January 2000). As a result of these share
acquisitions, earnings and losses per outstanding share have been higher than
would have been the case if no shares had been repurchased.

FISCAL 2004 VERSUS FISCAL 2003

        Gas sales increased $1,087 as a result of the Company's acquisition of
166 Appalachian gas properties on March 30 and 31, 2004 (see Note 4 to the
consolidated financial statements included in Item 8 of this 10-K). The Company
owned no oil and gas properties from September 2002 to March 30, 2004.

        Production expenses increased $315 as a result of the Company's
acquisition of 166 Appalachian gas properties on March 30 and 31, 2004 (see
Note 4). The Company owned no oil and gas properties from September 2002 to
March 30, 2004.

        Depreciation, depletion and amortization increased $195 from fiscal 2003
to fiscal 2004. The increase was entirely attributable to depletion of the gas
properties acquired by the Company in March 2004. In fiscal 2003, the Company
owned no oil or gas properties.

        General and administrative expenses increased $867 or 24.3% from the
year ended September 30, 2003 to the year ended September 30, 2004. The increase
resulted primarily from increased legal costs related to the ChevronTexaco
lawsuit. In addition, the Company recorded a bad debt provision of $86 for the
year ended September 30, 2004 because of delays and uncertainties in the
collection of estimated accounts receivable that were then over eighteen months
old. No similar bad debt provision was recorded for the year ended
September 30, 2003.

        The Company recorded no gain or loss in the value of the option it
granted to Delta for the year ended September 30 2004 because that option
expired unexercised on May 31, 2003. For the year ended September 30, 2003, the
Company recorded a $432 gain in the value of that option. The Company had
granted Delta an option to repurchase 3,188,667 of the Delta shares held by the
Company at $4.50/share until May 31, 2003 as part of the sale of its domestic
oil and gas properties to Delta on May 31, 2002. The Company owned 17.8% of
Delta on September 30, 2004.

        The Company recorded no portion of the loss of Network for the year
ended September 30 2004 because the Company had recorded a $354 impairment
provision on its equity investment in Network and a $126 allowance for doubtful
accounts on its note receivable from Network at March 31, 2003, reducing both
amounts to zero. The Company has no obligation to fund Network's future losses.
For the year ended September 30, 2004, Network's loss was $4. The Company owns
45% of Network.

                                      -14-
<PAGE>

        For the year ended September 30, 2003, the Company recorded $20 as its
portion of Network's loss.

        The Company's equity in Delta's net income increased $285 or 26.7% from
the year ended September 30, 2003 to the year ended September 30, 2004. The
increase was caused by Delta's increased net income, excluding the $1,782 gain
recorded by Delta on its sale of its Appalachian properties to the Company,
notwithstanding that the Company's percentage ownership of Delta decreased from
approximately 39% at September 30, 2003 to 17.8% at September 30, 2004. The
Company did not record any portion of Delta's gain on the Appalachian property
sale because intercompany profits are eliminated under the equity method (see
Notes 4 and 10).

        During the year ended September 30, 2004, the Company sold all of its
holdings in Penn Octane Corporation ("Penn Octane"), constituting 1,343,600
shares of common stock of Penn Octane, for $2,809 resulting in a gain on the
sale of $538. As a result of the sale, the Company's only remaining marketable
securities consist of 354 shares of ChevronTexaco, which had a market value of
$19 at September 30, 2004. In addition, during the year ended
September 30, 2004, the Company sold 2,948,289 shares of Delta for $29,339,
resulting in a gain of $18,211 (see Note 10). There were no such sales during
the year ended September 30, 2003.

        For the year ended September 30, 2004, the Company recorded a tax
provision of $2,385 or 14.9% of pre-tax book income for the period. This
provision was significantly less than that which would be obtained using the
Company's blended tax rate (Federal and state taxes combined) of 36% because the
Company was able to utilize its tax carryforwards and was thus able to release
its valuation allowance.

        The $349 tax benefit for the year ended September 30, 2003 resulted
primarily because of changes in the Company's expectations concerning future
taxable income.

FISCAL 2003 VERSUS FISCAL 2002

        As noted above, the Company sold all of its domestic oil and gas
properties to Delta on May 31, 2002. In addition, on September 6, 2002, the
Company sold all of its oil and gas interests in Romania to the operator of the
Romanian concessions. As a result of these sales, the Company did not directly
own any operating assets in fiscal 2003. Furthermore, after May 31, 2002, the
Company reduced the number of its employees from 27 to 5. As a result of these
asset sales and the reduction in the Company's employees, comparison of fiscal
2003 and fiscal 2002 operations by revenue and expense category is not
meaningful. Discussion will, therefore, be limited to analysis of operations for
the year ended September 30, 2003 with comparisons to prior year's operations
only where warranted.

        The Company earned no oil and gas sales and incurred no oil and gas
production expenses during the period from October 1, 2002 to September 30, 2003
because the Company sold all of its producing oil and gas properties to Delta on
May 31, 2002.

        General and administrative expenses decreased $2,466 or 40.9% from the
year ended September 30, 2002 to the year ended September 30, 2003 primarily
because of the reduction of employees from twenty-seven to five. The decrease
was, however, partially offset by increased legal expenses related to the
ChevronTexaco litigation (see Note 14 to the consolidated financial statements).
Legal expenses for the year ended September 30, 2003 were approximately $1,500.
Although the Company has significantly reduced its personnel costs, its public
company costs (audit, printing, legal compliance, stock transfer fees, stock
exchange costs, etc.) continue and significant legal costs related to the
ChevronTexaco litigation continue and are expected in the future.

        Depreciation, depletion and amortization decreased $3,095 from fiscal
2002 to fiscal 2003 because the Company sold all its producing oil and gas
properties to Delta in May 2002 and thus incurred no depletion expense during
fiscal 2003. The $56 of depreciation, depletion and amortization for fiscal 2003
consists of depreciation of the Company's office equipment and furniture.

                                      -15-
<PAGE>

        The following other income items for the year ended September 30, 2003
relate to and result from the sale of the Company's domestic oil and gas
properties to Delta on May 31, 2002:

<TABLE>
<CAPTION>
                                                                    YEAR ENDED SEPTEMBER 30,
                                                                   -------------------------
                                                                       2003         2002
                                                                   -----------   -----------
            <S>                                                    <C>           <C>
            Decrease in fair value of option granted to Delta ..   $       432   $     2,250
                                                                   ===========   ===========
            Equity in income (loss) of Delta ...................   $     1,067   $      (598)
                                                                   ===========   ===========
</TABLE>

        The $ 2,250 and $432 decreases in the value of the option granted to
Delta relates to decreases in the fair value of the option that the Company
granted to Delta to acquire 3,188,667 of its shares back from the Company at
$4.50 per share through May 31, 2003. That option expired unexercised on
May 31, 2003. The fair market value of Delta's option decreased primarily
because of a decrease in Delta's share price from May 31, 2002 to March 31, 2003
and the passage of time. The equity in the income of Delta represents the
Company's share of Delta's estimated net income for the period from October 1,
2002 to September 30, 2003. The Company owned approximately 41% of Delta at
September 30, 2003. Prior to May 31, 2002 the Company owned only 3.4% of Delta
and accounted for its investment in Delta as available-for-sale securities.
Commencing June 1, 2002, the Company accounted for its investment in Delta using
the equity method. See "Critical Accounting Policies" below. Since the Company
included 41% of Delta's income (loss) in its own net income (loss), the
Company's future net income (losses) are significantly impacted by oil and gas
prices and other factors affecting Delta's operations.

        The Company's equity in the loss of Network decreased $156 from $176 for
the year ended September 30, 2002 to $20 for the year ended September 30, 2003.
The decrease results from decreased expenses incurred by Network and the fact
that the Company provided a 100% impairment provision for its investment in and
loan to Network at March 31, 2003. As a result of such provisions, which reduced
the book value of the Company's investment in and loan to Network to zero as of
March 31, 2003, the Company ceased recording any further equity in Network's
losses subsequent to March 31, 2003. For the six months ended
September 30, 2003, Network recorded a net loss of $11, no portion of which was
recorded by the Company.

        The impairment provision for the Company's investment in Network
consists of a $354 provision related to the Company's 45% equity invested in
Network and a $126 reserve provision for the Company's loan receivable from
Network. The Company recorded the impairment provision at March 31, 2003 because
Network had not then obtained contracts for the services it offers. Network,
nevertheless, continues to solicit such contracts. If Network enters into any
joint venture, the Company has the right but not the obligation to convert its
investment in and loan receivable from Network into an investment in such joint
venture.

        The $349 tax benefit for the year ended September 30, 2003 results
primarily from changes in the Company's expectations concerning future taxable
income. The Company increased its valuation allowance at September 30, 2002 by
$1,512 during the year ended September 30, 2003, resulting in a deferred tax
asset, net of $649 of accrued income taxes on appreciation of marketable
securities, of $366. The net deferred tax asset at September 30, 2003 relates to
income that has been recognized for tax purposes, but has not yet been
recognized for financial reporting purposes.

        Since November of 1996, the Company has reacquired 4,911,020 shares or
69% of its previously outstanding common stock (after taking into account a
three for one stock split in January 2000). As a result of these share
acquisitions, earnings and losses per outstanding share have been higher than
would be the case if no shares had been repurchased.

LIQUIDITY AND CAPITAL RESOURCES

        During the year ended September 30, 2004, $505 was provided by operating
activities. During the same period the Company paid $9,466 for oil and gas
properties and vehicles and $1,331 for dividends to stockholders. During the
same period the Company received $29,339 in proceeds from the sale of part of
its investment in Delta Petroleum Corporation and $2,809 in proceeds from the
sale of marketable securities. At September 30, 2004, the Company had $33,742 of
unrestricted cash, $33,003 of working capital and no long-term debt.

                                      -16-
<PAGE>

        At September 30, 2004, the Company's long-term obligations were as
follows:

<TABLE>
<CAPTION>
                                      PAYMENTS DUE BY PERIODS STARTING OCTOBER 1, 2004
                                      ------------------------------------------------
                                        LESS
                                        THAN       2-3       4-5     AFTER 5
                                       1 YEAR     YEARS     YEARS     YEARS     TOTAL
                                      --------   -------   -------   -------   -------
        <S>                           <C>        <C>       <C>       <C>       <C>
        Operating leases ...........  $    197   $   120   $    61             $   378
        Asset retirement obligations         3         6         6   $   215       230
                                      --------   -------   -------   -------   -------
                                      $    200   $   126   $    67   $   215   $   608
                                      ========   =======   =======   =======   =======
</TABLE>

        At the present time, the Company's anticipated future cash expenditures
are primarily recurring general and administrative costs, including substantial
legal costs related to the ChevronTexaco litigation (see Note 14 to the
consolidated financial statements included in Item 8 to this Form 10-K),
recurring dividends and lease operating costs related to the Appalachian gas
properties acquired by the Company (see Note 4 to the consolidated financial
statements included in Item 8 to this Form 10-K). In addition, the Company
continues to review possible future acquisitions of oil and gas properties and,
if the Company is successful in such pursuits, additional expenditures would be
required. To the extent that such anticipated expenditures cannot be funded from
cash flow from the Company's oil and gas operations, the Company can fund such
expenditures using its available cash. If the Company were to make another
substantial acquisition in excess of its current cash and other liquid working
capital, the Company believes it could fund such acquisitions by selling
additional shares of Delta or by renewing its previous oil and gas borrowing
arrangements with an energy bank and using the related loan proceeds for the
acquisition.

        The Company's future operations are subject to the following risks:

        a.      Litigation - As noted above, the Company is a defendant in three
                significant unsettled lawsuits. Although the Company does not
                believe it has any material unrecorded liabilities with respect
                to any of these lawsuits, the Company could incur significant
                liabilities if it ultimately is judged to be liable in these
                lawsuits. This litigation could cause the Company to incur
                significant legal costs. If ChevronTexaco were to prevail on its
                indemnity claim in its lawsuit (Note 14 to the consolidated
                financial statements), the Company could be held liable for the
                entirety of the estimated cleanup costs, a sum far in excess of
                the Company's financial capability.

        b.      Exploration and Production Price Risk - The Company has not
                hedged any of its anticipated future gas production because the
                cost to do so appears excessive when compared to the risk
                involved. As a result, the Company remains exposed to future gas
                price changes with respect to all of its anticipated future gas
                production. Such exposure could be significant given the
                volatility of gas prices. For example, natural gas prices have
                increased over 50% from 2002 to 2004 and could either increase
                or decrease a similar percentage in the future. When the Company
                acquired its gas properties in March 2004, the prices being
                received for natural gas were $5.00 to $6.00 per mcf sold. The
                Company paid for its gas reserves acquisitions using such
                pricing. If natural gas prices decrease in the future, the
                decrease will directly impact the Company's gas sales, operating
                income and net income. In addition, if gas prices are low at the
                end of the Company's quarterly and annual reporting periods, the
                value of the Company's gas reserve may decrease such that the
                Company would be forced to record an impairment provision - see
                "Critical Accounting Policies" below.

        c.      Exploration and Production Operating Risk - All of the Company's
                current gas properties are onshore properties with relatively
                low operating risk. Nevertheless, the Company faces the risks
                encountered from operating approximately 130 gas wells -
                including the risk of gas leaks, resulting environmental damage,
                third party liability claims related to operations, including
                claims by landowners where the operated wells are located, as
                well as general operating risks.

        d.      Public Market for the Company's Stock - Although there presently
                exists a market for the Company's stock, such market is volatile
                and the Company's stock is thinly traded. This volatility may
                adversely affect the market price and liquidity of the Company's
                common stock.

                                      -17-
<PAGE>

        e.      Other Risks - In addition to the specific risks noted above, the
                Company is subject to general business risks, including
                insurance claims in excess of insurance coverage, tax
                liabilities resulting from tax audits and the risks associated
                with the increased litigation that appear to affect most
                corporations.

        f.      Market Value of Delta Stock - The Company currently owns
                7,000,000 shares of Delta. At September 30, 2004, the market
                value of such shares was $91,280,000 and constituted the largest
                asset of the Company. In the past year Delta's stock price has
                increased significantly and fluctuated significantly over short
                periods of time. If Delta's stock price decreases significantly
                - especially at a time when the Company expects to liquidate
                some or all of its Delta stock - the Company would be adversely
                affected.

        g.      Future of the Company- Although the Company has recently
                acquired interests in 166 gas wells in Pennsylvania (see Note
                4), the Company is smaller than most of its competitors which
                benefit from better fixed cost efficiencies than the Company
                given their larger sizes and revenues. The Company's fixed costs
                (computer system, technical skills, field offices, public
                company compliance costs, etc.) have consumed and are expected
                to continue to consume a greater percentage of the Company's oil
                and gas revenues than do those of most of its larger competitors
                unless the Company is able to make additional future
                acquisitions at favorable prices. Upon resolution of the
                Company's outstanding litigation - whether by settlement or
                judgment - the Company's directors may consider options to
                liquidate the Company or merge the Company into another company
                to maximize stockholder value. If such were the case, the
                Company would face risks concerning the value of the Delta
                shares it owns, tax risks and risks in the liquidation of its
                assets.

QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

        On March 30 and 31, 2004, the Company acquired interests in Pennsylvania
gas wells (see Note 4). The Company has not hedged its share of the expected
natural gas production from these wells. As a result, the Company remains at
risk with respect to such unhedged expected production. If market prices
increase, gas sales applicable to the unhedged production will increase. If
market prices decrease, gas sales and the gross margin related to such unhedged
production will decrease.

        At September 30, 2004, the Company owned 7,000,000 shares of Delta. The
stock price of Delta has fluctuated significantly in the last three years and
thus the market value of the Company's investment in Delta remains subject to
significant changes in the market price of Delta stock.

INFLATION AND CHANGING PRICES

        Gas sales are determined by markets locally and worldwide and often move
inversely to inflation. In the last three years gas prices have increased over
50%. In prior periods such prices have decreased significantly - often over a
very short period of time. Since the Company has not hedged its future gas
production, its operating income (loss) and gas revenues are subject to changes
in gas prices. Inflation has not had and is not expected to have a material
effect on the Company's results of operations.

NEW ACCOUNTING PRONOUNCEMENTS

        In December 2003, the FASB issued revised Interpretation No. 46,
"Consolidation of Variable Interests Entities, an Interpretation of ARB No. 51"
("Interpretation No. 46R"). This Interpretation addresses the consolidation by
business enterprises of variable interest entities as defined in the
Interpretation. Interpretation No. 46R applies immediately to variable interests
in variable interest entities created after January 31, 2003, and to variable
interests in variable interest entities obtained after January 31, 2003. For
public enterprises with a variable interest in a variable interest entity
created before February 1, 2003, the Interpretation applies to that enterprise
no later than the end of the first interim or annual reporting period ending
after March 31, 2004. The provisions of Interpretation No. 46R have not had an
effect on the Company's financial position and results of operations to date,
and the Company does not presently expect Interpretation No. 46R to have any
effect on the Company's future financial position or results of operations.

        On September 28, 2004, the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 106 ("SAB No. 106"). SAB No. 106 applies to
companies using the full cost method of accounting for oil and gas properties
and equipment costs, such as the Company. SAB No. 106 is expected to affect the
way in which the Company calculates its full cost ceiling limitation (the
Company will henceforth exclude asset retirement costs related to proved
developed properties in the calculation of the ceiling) and the way the Company
calculates depletion on its gas properties (only asset retirement costs

                                      -18-
<PAGE>

for new recompletions and new wells will be included in calculating depletion
rates). The Company adopted SAB No. 106 on October 1, 2004. The Company expects
the adoption of SAB No. 106 on future operating costs, operating income (loss)
and net income (loss) to be immaterial.

        In December 2004, the FASB issued Statement of Financial Accounting
Standards No. 123 (revised 2004), "Share- Based Payment" ("SFAS No. 123(R)").
SFAS No. 123(R) requires an entity to recognize the grant-date fair value of
stock options and other equity-based compensation issued to employees in the
income statement. SFAS No. 123(R) will be effective for the Company beginning
July 1, 2005. The Company does not expect SFAS No. 123(R) to have a material
impact on its results of operations.

        In December 2004, the FASB issued FASB Staff Position FAS 109-1,
"Application of FASB Statement No. 109, Accounting for Income Taxes, for the Tax
Deduction Provided to U.S. Based Manufacturers by the American Jobs Creation Act
of 2004" (FSP 109-1). FSP 109-1 clarifies how to apply Statement No. 109 to the
new law's tax deduction for income attributable to "domestic production
activities." The Company is currently evaluating the impact of the new law.

CRITICAL ACCOUNTING POLICIES:

        The accounting policies critical to the Company are as follows:

EQUITY METHOD OF ACCOUNTING

        At September 30, 2004, the Company owned 17.8% of Delta and accounted
for its investment in Delta using the equity method of accounting. Under this
method, the Company is required to increase its investment in Delta by its share
of Delta's income and decrease such investment by its share of Delta's losses
and any distributions from Delta. If Delta incurs future losses, the Company
would thus include its share of such losses in its consolidated statement of
operations. In addition, the Company estimates that its investment in Delta
exceeded the Company's proportional share of Delta's equity by approximately
$4,000 at September 30, 2004. The Company has allocated such excess to Delta's
ownership interests in offshore California leases due to the potential recovery
from a lawsuit Delta and other owners of offshore California leases have
instituted against the United States for breach of contract. The Company is
required to evaluate the recoverability of the leases periodically and write off
the excess costs or reduce them to the extent they are not deemed recoverable.
In addition, if Delta incurs recurring losses in the future and/or the market
value of its stock declines significantly, the Company's investment in the
future in Delta could become impaired and the Company would then be required to
recognize the impairment. In addition, since the Company only owns 17.8% of
Delta currently, it is possible that the Company may commence accounting for its
investment in Delta as a marketable security if management considers the
Company's influence on Delta to be less than significant. Although the Company's
interest in Delta has decreased below 20%, the Company has continued to account
for its investment in Delta using the equity method because three of the
Company's directors currently comprise one-third of Delta's directors and thus
the Company can be deemed to still exercise significant influence on Delta. If
the Company's influence in Delta continues to decrease to a level at which it no
longer is considered to have a significant influence, the Company would record
its investment as a marketable security using the provisions of SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities."

DISCONTINUED REFINING OPERATIONS

        At September 30, 2004, the Company had recorded net refining liabilities
retained of $2,404. As noted in Note 14 to the consolidated financial statements
in this Form 10-K, ChevronTexaco has sued the Company for environmental
remediation costs that have been estimated at $80,000-$150,000. In January 2003,
the United States and the State of Illinois filed a motion which estimated the
total costs for just one portion of the Indian Refinery-Texaco-Lawrenceville
Superfund Site to be $109,000 to $205,000. The Company's accounting policy with
respect to contingent environmental liabilities is to record environmental
liabilities when and if environmental assessment and/or remediation costs are
probable and can be reasonably estimated. Although the Company and its special
counsel do not consider an unfavorable and final outcome for the Company in
ChevronTexaco's lawsuit to be probable, the Company would be required to record
additional environmental liabilities if it becomes probable that the Company
will incur liabilities related to ChevronTexaco's claims and/or other
environmental liabilities and such liabilities exceed $2,404. As noted above, if
such liabilities exceed the value of the Company's assets, the Company would not
have the financial capability to pay such liabilities. The amounts

                                      -19-
<PAGE>

and classification of the estimated values of discontinued net refining assets
and net refining liabilities retained could change significantly in the future
as a result of litigation or other factors.

VALUATION ALLOWANCE FOR DEFERRED INCOME TAX ASSET

        The Company evaluates whether its deferred tax assets should be reduced
by a valuation allowance based upon whether realization of such deferred tax
assets is or is not more likely than not.

        At September 30, 2004, the Company recorded no valuation allowance
offsetting its gross deferred tax asset of $757 at that date. Recording no
valuation allowance is based upon the Company's assessment that the Company will
generate future taxable income to utilize all of its gross deferred tax asset at
September 30, 2004. If circumstances change such that the Company no longer
expects future taxable income or expects less future taxable income, the Company
will revise its valuation allowance, which could result in tax expense.

INVESTMENT IN NETWORK

        At March 31, 2003, the Company recorded a $480 impairment provision
related to its investment in Network. This provision consisted of $354 provision
related to the Company's 45% equity investment in Network and a $126 provision
related to the Company's $126 note receivable from Network. As a result of these
impairment provisions, the Company's investment in Network was reduced to zero.
The impairment provisions were recorded because Network had not entered into any
revenue generating contracts by that date. Subsequently, Network entered into
its first revenue producing contract and recorded net income of $13 for the
quarter ended September 30, 2004. If Network is able to enter into additional
revenue-generating contracts and generate future net income, the Company may
commence recording its share of Network's future net income under the equity
method of accounting once the Company's share of such income has exceeded the
Company's share of unrecorded Network losses since March 31, 2003, the date that
the Company ceased recognizing its share of Network's losses.

FULL COST METHOD OF ACCOUNTING FOR OIL AND GAS PROPERTIES

        The Company follows the full-cost method of accounting for oil and gas
properties and equipment costs. Under this method of accounting, net capitalized
costs, less related deferred income taxes, in excess of the present value of net
future cash inflows (oil and gas sales less production expenses) from proved
reserves, tax effected and discounted at 10%, and the cost of properties not
being amortized, if any, are charged to expense (full cost ceiling test). If at
a future reporting date oil and gas prices decline, it is possible that the
Company's book value will exceed the allowable full cost ceiling and the Company
would have to write down its oil and gas properties. Even if oil and gas prices
subsequently increase, the write down would not be restored under the full cost
method of accounting. Although the Company recorded no full cost ceiling
provision through September 30, 2004, it could be required to record such a
provision in the future - especially if there were a significant decrease in gas
prices by the end of a quarterly or annual financial reporting period.

        See "New Accounting Pronouncements."

                                      -20-

<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

<TABLE>
<CAPTION>
                                                                                                               PAGE
                                                                                                               ----
<S>                                                                                                             <C>
CONSOLIDATED FINANCIAL STATEMENTS:

Consolidated Statements of Operations for the Years Ended September 30, 2004, 2003 and 2002.................    22
Consolidated Balance Sheets as of September 30, 2004 and 2003...............................................    23
Consolidated Statements of Cash Flows for the Years Ended September 30, 2004, 2003 and 2002.................    24
Consolidated Statements of Stockholders' Equity  and Other Comprehensive Income for the Years
 Ended September 30, 2004, 2003 and 2002....................................................................    26
Notes to the Consolidated Financial Statements..............................................................    27

INDEPENDENT AUDITORS' REPORT................................................................................    58
</TABLE>

        All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.

                                      -21-
<PAGE>

                            CASTLE ENERGY CORPORATION
                      CONSOLIDATED STATEMENTS OF OPERATIONS
              ("$000'S" OMITTED EXCEPT SHARE AND PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                                    YEAR ENDED SEPTEMBER 30,
                                                                          --------------------------------------------
                                                                              2004            2003            2002
                                                                          ------------    ------------    ------------
<S>                                                                       <C>             <C>             <C>
Revenues:
  Oil and gas sales ...................................................   $      1,087                    $      9,445
                                                                          ------------                    ------------
                                                                                 1,087                           9,445
                                                                          ------------                    ------------
Expenses:
  Oil and gas production ..............................................            315                           3,267
  General and administrative ..........................................          4,432    $      3,565           6,031
  Depreciation, depletion and amortization ............................            251              56           3,151
  Litigation provision ................................................            825
  Loss on sale of unproved Romanian properties ........................                                            311
                                                                          ------------    ------------    ------------
                                                                                 5,823           3,621          12,760
                                                                          ------------    ------------    ------------
Operating income (loss) ...............................................         (4,736)         (3,621)         (3,315)
                                                                          ------------    ------------    ------------
Other income (expense):
  Gain on sale of marketable securities ...............................            538
  Gain on sale of Delta Petroleum Corporation investment ..............         18,211
  Gain on sale of oil and gas properties ..............................                                          1,295
  Interest income .....................................................            208             255             157
  Other income ........................................................            432              17              16
  Impairment provision - marketable securities ........................                                           (388)
  Impairment provision - investment in Networked Energy
   LLC ................................................................                           (480)
  Decrease in fair value of option granted to Delta
   Petroleum Corporation ..............................................                            432           2,250
  Equity in loss of Networked Energy LLC ..............................                            (20)           (176)
  Equity in income (loss) of Delta Petroleum Corporation ..............          1,352           1,067            (598)
                                                                          ------------    ------------    ------------
                                                                                20,741           1,271           2,556
                                                                          ------------    ------------    ------------
Income (loss) before provision for (benefit of) income taxes ..........         16,005          (2,350)           (759)
                                                                          ------------    ------------    ------------
Provision for (benefit of) income taxes:
    State .............................................................             63             (10)             30
    Federal ...........................................................          2,322            (339)          1,055
                                                                          ------------  --------------   -------------
                                                                                 2,385            (349)          1,085
                                                                          ------------  --------------   -------------
Net income (loss) .....................................................   $     13,620    $     (2,001)   $     (1,844)
                                                                          ============    ============    ============
Net income (loss) per share:
    Basic .............................................................   $       2.04    $       (.30)   $       (.28)
                                                                          ============    ============    ============
    Diluted ...........................................................   $       1.96    $       (.30)   $       (.28)
                                                                          ============    ============    ============
Weighted average number of common and potential dilutive common shares
 outstanding:
    Basic .............................................................      6,675,538       6,592,884       6,629,376
                                                                          ============    ============    ============
    Diluted ...........................................................      6,933,982       6,592,884       6,629,376
                                                                          ============    ============    ============
</TABLE>

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

                                      -22-
<PAGE>

                            CASTLE ENERGY CORPORATION
                           CONSOLIDATED BALANCE SHEETS
              ("$000'S" OMITTED EXCEPT SHARE AND PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                                        SEPTEMBER 30,
                                                                                 ---------------------------
                                                                                     2004           2003
                                                                                 ------------   ------------
<S>                                                                              <C>            <C>
                                       ASSETS
Current assets:
  Cash and cash equivalents ..................................................   $     33,742   $     10,615
  Restricted cash ............................................................            120          4,285
  Accounts receivable ........................................................            582            152
  Account receivable - Delta Petroleum Corporation ...........................            339
  Marketable securities ......................................................             19          4,088
  Prepaid expenses and other current assets ..................................            203            112
  Note receivable - Networked Energy LLC, net of allowance for doubtful account
   of $126 ...................................................................
  Deferred income taxes ......................................................                           648
                                                                                 ------------   ------------
      Total current assets ...................................................         35,005         19,900
Property, plant and equipment, net:
  Furniture, fixtures, equipment and vehicles ................................            111             65
  Oil and gas properties, net (full cost method):
    Proved properties ........................................................          9,012
    Unproved properties not being amortized ..................................
Investment in Networked Energy LLC, net of impairment reserve of $354 ........
Investment in Delta Petroleum Corporation ....................................         39,698         29,477
Deferred income taxes ........................................................                           366
                                                                                 ------------   ------------
    Total assets .............................................................   $     83,826   $     49,808
                                                                                 ============   ============

                        LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Dividend payable ...........................................................   $        343   $        330
  Accounts payable ...........................................................            749            541
  Accrued expenses ...........................................................            906            241
  Accrued taxes on appreciation of marketable securities .....................              1            649
  Asset retirement obligations ...............................................              3
                                                                                 ------------   ------------
    Total current liabilities ................................................          2,002          1,761
Net refining liabilities retained ............................................          2,404          2,404
Asset retirement obligations .................................................            227
Deferred income taxes ........................................................          5,170
Other liabilities ............................................................             19
                                                                                 ------------   ------------
    Total liabilities ........................................................          9,822          4,165
                                                                                 ------------   ------------
Commitments and contingencies
Stockholders' equity:
  Series B participating preferred stock; par value - $1.00;
   10,000,000 shares authorized; no shares issued
  Common stock; par value - $0.50; 25,000,000 shares authorized; 11,781,404
   shares issued at September 30, 2004 and 11,503,904 shares issued at
   September 30, 2003 ........................................................          5,891          5,752
  Additional paid-in capital .................................................         85,691         68,532
  Accumulated other comprehensive income, net of taxes .......................            170          1,383
  Retained earnings ..........................................................         48,919         36,643
                                                                                 ------------   ------------
                                                                                      140,671        112,310
  Treasury stock at cost - 4,911,020 shares at September 30, 2004 and
   September 30, 2003 ........................................................        (66,667)       (66,667)
                                                                                 ------------   ------------
    Total stockholders' equity ...............................................         74,004         45,643
                                                                                 ------------   ------------
    Total liabilities and stockholders' equity ...............................   $     83,826   $     49,808
                                                                                 ============   ============
</TABLE>

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

                                      -23-
<PAGE>

                            CASTLE ENERGY CORPORATION
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
              ("$000'S" OMITTED EXCEPT SHARE AND PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                                             YEAR ENDED SEPTEMBER 30,
                                                                                   --------------------------------------------
                                                                                       2004            2003            2002
                                                                                   ------------    ------------    ------------
<S>                                                                                <C>             <C>             <C>
Cash flows from operating activities:
  Net income (loss) ............................................................   $     13,620    $     (2,001)   $     (1,844)
                                                                                   ------------    ------------    ------------
  Adjustments to reconcile net income (loss) to cash provided by (used in)
   operating activities:
    Provision for bad debts ....................................................             86
    Depreciation, depletion and amortization ...................................            251              56           3,151
    Write offs - property, plant and equipment .................................                             32
    Decrease in fair value of option granted to Delta Petroleum Corporation ....                           (432)         (2,250)
    Gain on sale of marketable securities ......................................           (538)
    Gain on sale of investment in Delta Petroleum Corporation ..................        (18,211)
    Deferred income tax expense (benefit) ......................................          2,047            (349)          1,085
    Gain on sale of domestic oil and gas properties ............................                                         (1,295)
    Loss on sale of unproved Romanian properties ...............................                                            311
    Impairment of investment in Networked Energy LLC ...........................                            480
    Impairment of marketable securities ........................................                                            388
    Equity in (income) loss of Networked Energy LLC ............................                             20             176
    Equity in (income) loss of Delta Petroleum Corporation .....................         (1,352)         (1,067)            598
    Changes in assets and liabilities:
      (Increase) decrease in restricted cash ...................................          4,165             (55)         (3,860)
      (Increase) decrease in accounts receivable ...............................           (499)            (44)          2,678
      (Increase) decrease in prepaid expenses and other current assets .........            (81)             85              80
      Increase (decrease) in accounts payable ..................................            208             128          (3,130)
      Increase (decrease) in accrued expenses ..................................            665            (322)            271
      Increase (decrease) in other long-term liabilities .......................             19             (11)              2
                                                                                   ------------    ------------    ------------
        Total adjustments ......................................................        (13,240)         (1,479)         (1,795)
                                                                                   ------------    ------------    ------------
        Net cash flow provided by (used in) operating activities ...............            380          (3,480)         (3,639)
                                                                                   ------------    ------------    ------------
Cash flows from investing activities:
  Proceeds from sale of marketable securities ..................................          2,809
  Proceeds from sale of investment in Delta Petroleum Corporation ..............         29,339
  Proceeds from sale of oil and gas properties .................................                                         15,478
  Investment in oil and gas properties .........................................         (9,341)                           (810)
  Investment in Networked Energy LLC ...........................................                           (125)           (150)
  Purchase of furniture, fixtures and equipment ................................           (102)                             (7)
  Other ........................................................................              2               2
                                                                                   ------------    ------------    ------------
        Net cash provided by (used in) investing activities ....................         22,707            (123)         14,511
                                                                                   ------------    ------------    ------------
</TABLE>

                            (continued on next page)

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

                                      -24-
<PAGE>

                            CASTLE ENERGY CORPORATION
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                               ("$000'S" OMITTED)
                         (continued from previous page)

<TABLE>
<CAPTION>
                                                                                             YEAR ENDED SEPTEMBER 30,
                                                                                   --------------------------------------------
                                                                                       2004            2003            2002
                                                                                   ------------    ------------    ------------
<S>                                                                                <C>             <C>             <C>
Cash flows from financing activities:
  Proceeds from exercise of stock options ......................................          1,371
  Acquisition of treasury stock ................................................                                           (161)
  Dividends paid to stockholders ...............................................         (1,331)         (1,321)         (1,016)
                                                                                   ------------    ------------    ------------
        Net cash provided by (used in) financing activities ....................             40          (1,321)         (1,177)
                                                                                   ------------    ------------    ------------
Net increase (decrease) in cash and cash equivalents ...........................         23,127          (4,924)          9,695
Cash and cash equivalents - beginning of period ................................         10,615          15,539           5,844
                                                                                   ------------    ------------    ------------
Cash and cash equivalents - end of period ......................................   $     33,742    $     10,615    $     15,539
                                                                                   ============    ============    ============
Supplemental disclosures of cash flow information are as follows:
  Cash paid during the period:
    Income taxes ...............................................................   $        350    $         13
                                                                                   ============    ============
  Accrued dividends ............................................................   $        343    $        330    $        330
                                                                                   ============    ============    ============
  Unrealized gain (loss) on investment in available-for-sale marketable
   securities ..................................................................                   $        666    $     (1,113)
                                                                                                   ============    ============
  Exchange of oil and gas properties for Delta Petroleum Corporation
   common stock ................................................................                                   $     26,952
                                                                                                                   ============
  Estimated value of Delta option to repurchase 3,188,667 Delta shares .........                                   $      2,682
                                                                                                                   ============
  Issuance of additional equity by Delta Petroleum Corporation and
   option expense credited directly to paid-in-capital by Delta, net of $4,595
   and $0, respectively, of income taxes .......................................   $     15,459    $      1,167
                                                                                   ============    ============
</TABLE>

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

                                      -25-
<PAGE>

                            CASTLE ENERGY CORPORATION
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                         AND OTHER COMPREHENSIVE INCOME
                   ("$000'S" OMITTED EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                 YEARS ENDED SEPTEMBER 30, 2004, 2003 AND 2002
                                            --------------------------------------------------------------------------------
                                                                                                   ACCUMULATED
                                                COMMON STOCK          ADDITIONAL                      OTHER
                                            -----------------------    PAID-IN     COMPREHENSIVE   COMPREHENSIVE   RETAINED
                                              SHARES        AMOUNT     CAPITAL        INCOME       INCOME (LOSS)   EARNINGS
                                            ----------    ---------   ----------   -------------   -------------   ---------
<S>                                         <C>           <C>         <C>          <C>             <C>             <C>
Balance - October 1, 2001................   11,503,904    $   5,752   $   67,365                   $       1,600   $  42,816
Stock acquired...........................
Dividends declared ($.15 per share)......                                                                             (1,007)
Comprehensive income (loss):
  Net income (loss)......................                                          $      (1,844)                     (1,844)
  Other comprehensive income (loss):
    Unrealized gain (loss) on
     marketable securities, net of
     $626 tax benefit....................                                                 (1,113)         (1,113)
                                                                                   -------------
                                            ----------    ---------   ----------   $      (2,957)  -------------   --------
Balance - September 30, 2002.............   11,503,904        5,752       67,365   =============             487     39,965

Issuance of additional stock by
 Delta Petroleum Corporation.............                                  1,167
Dividends declared ($.20 per share)......                                                                             (1,321)
Comprehensive income (loss):
  Net income (loss)......................                                          $      (2,001)                     (2,001)
  Other comprehensive income (loss):
    Unrealized gain (loss) on
     marketable securities, net of
     $375 of income taxes................                                                    666             666
    Equity in other comprehensive
     income (loss) of Delta
     Petroleum Corporation, net of
     $129 tax benefit....................                                                    230             230
                                                                                   -------------
                                            ----------    ---------   ----------   $      (1,105)  -------------   ---------
Balance - September 30, 2003.............   11,503,904        5,752       68,532   =============           1,383      36,643

Options exercised........................      277,500          139        1,232
Tax benefit of options exercised.........                                    468
Issuance of additional stock by Delta
 Petroleum Corporation, net of $4,595 tax                                 15,459
Dividends declared ($.20 per share)......                                                                             (1,344)
Comprehensive income (loss):
  Net income (loss)......................                                          $      13,620                      13,620
  Other comprehensive income (loss):
    Reclassification adjustment, net of
     $649 tax............................                                                 (1,153)         (1,153)
    Equity in other comprehensive
     income (loss) of Delta Petroleum
     Corporation, net of $32 tax benefit                                                     (60)            (60)
                                            ----------    ---------   ----------   -------------   -------------   ---------
                                                                                   $      12,407
Balance - September 30, 2004.............   11,781,404    $   5,891   $   85,691   =============   $         170   $  48,919
                                            ==========    =========   ==========                   =============   =========
<CAPTION>
                                            YEARS ENDED SEPTEMBER 30, 2004, 2003 AND 2002
                                            ---------------------------------------------
                                                  TREASURY STOCK
                                            ---------------------------
                                              SHARES          AMOUNT          TOTAL
                                            ------------    -----------    ------------
<S>                                            <C>          <C>            <C>
Balance - October 1, 2001................      4,871,020    $   (66,506)   $     51,027
Stock acquired...........................         40,000           (161)           (161)
Dividends declared ($.15 per share)......                                        (1,007)
Comprehensive income (loss):.............
  Net income (loss)......................                                        (1,844)
  Other comprehensive income (loss):
    Unrealized gain (loss) on
     marketable securities, net of
     $626 tax benefit....................                                        (1,113)
                                            ------------    -----------    ------------
Balance - September 30, 2002.............      4,911,020        (66,667)         46,902

Issuance of additional stock by
 Delta Petroleum Corporation.............                                         1,167
Dividends declared ($.20 per share)......                                        (1,321)
Comprehensive income (loss):
  Net income (loss)......................                                        (2,001)
  Other comprehensive income (loss):
    Unrealized gain (loss) on
     marketable securities, net of
     $375 of income taxes................                                           666
    Equity in other comprehensive
     income (loss) of Delta
     Petroleum Corporation, net of
     $129 tax benefit....................                                           230
                                            ------------    -----------    ------------
Balance - September 30, 2003.............      4,911,020        (66,667)         45,643

Options exercised........................                                         1,371
Tax benefit of options exercised.........                                           468
Issuance of additional stock by Delta
 Petroleum Corporation, net of $4,595 tax                                        15,459
Dividends declared ($.20 per share).                                             (1,344)
Comprehensive income (loss):
  Net income (loss) .....................                                        13,620
  Other comprehensive income (loss):
    Reclassification adjustment, net of
     $649 tax............................                                        (1,153)
    Equity in other comprehensive
     income (loss) of Delta Petroleum
     Corporation, net of $32 tax benefit                                            (60)
                                            ------------    -----------    ------------
Balance - September 30, 2004.............      4,911,020    $   (66,667)   $     74,004
                                            ============    ===========    ============
</TABLE>

                                      -26-
<PAGE>

                            CASTLE ENERGY CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ("$000'S" OMITTED EXCEPT PER SHARE AMOUNTS)

NOTE 1 - BUSINESS AND ORGANIZATION

        BUSINESS

        References to Company mean Castle Energy Corporation, the parent, and/or
one or more of its subsidiaries. Such references are for convenience only and
are not intended to describe legal relationships.

        Castle Energy Corporation (the "Company") is a public company
incorporated in Delaware. Mr. Joseph L. Castle II, Chairman of the Board and
Chief Executive Officer, and his wife owned twenty-two and one-half percent
(22.5%) of the Company's outstanding common stock at September 30, 2004 and
December 1, 2004.

        EXPLORATION AND PRODUCTION

        From inception until May 31, 2002, the Company was engaged in the
exploration and production segment of the energy business. On May 31, 2002, the
Company sold all of its domestic oil and gas properties to Delta Petroleum
Corporation, another public exploration and production company ("Delta"). On
September 6, 2002, a subsidiary of the Company sold all of its interests in oil
and gas concessions in Romania to the operator of the Romanian concessions. From
September 2002 until March 30, 2004, the Company owned no oil and gas properties
or other operating assets. On March 30 and March 31, 2004, the Company acquired
interests in 166 gas wells in western Pennsylvania (see Note 4.) In addition, as
a result of its 17.8% ownership of Delta at September 30, 2004, the Company is
still indirectly involved in the exploration and production business
- see Notes 4 and 10.

        NATURAL GAS MARKETING

        In December 1992, the Company acquired a long-term natural gas sales
contract with Lone Star Gas Company ("Lone Star Contract") and a gas pipeline.
The Company also entered into two long-term gas sales contracts and one
long-term gas purchase contract with MG Natural Gas Corp. ("MGNG"), a subsidiary
of MG Corp. ("MG"), which, in turn, is a United States subsidiary of
Metallgesellschaft A.G. ("MGAG"), a German conglomerate. In May 1997, the
Company sold its natural gas pipeline to a subsidiary of Union Pacific Resources
Corporation ("UPRC") and thus exited the gas transmission business while still
conducting gas marketing operations. Effective May 31, 1999, the aforementioned
gas sales and gas purchase contracts expired by their own terms and were not
replaced by other third party gas marketing business. With the exception of the
Long Trusts Lawsuit (see Note 15), the Company and its subsidiaries are not
involved with any matters related to their former natural gas marketing
business.

        REFINING

        IRLP

        The Company indirectly entered the refining business in 1989 when one of
its subsidiaries acquired the operating assets of an idle refinery located in
Lawrenceville, Illinois (the "Indian Refinery"). The Indian Refinery was
subsequently operated by one of the Company's subsidiaries, Indian Refining I
Limited Partnership ("IRLP"), until September 30, 1995 when it was shut down. On
December 12, 1995, IRLP sold the Indian Refinery assets to American Western
Refining, L.P. ("American Western"). American Western subsequently filed for
bankruptcy and sold the Indian Refinery to an outside party which has
substantially dismantled it. American Western subsequently filed a Plan of
Liquidation. In April 2003, American Western's Plan of Liquidation was confirmed
by the bankruptcy court and IRLP subsequently received $599 which it distributed
to its creditors.

        In August 2002, ChevronTexaco sued the Company and two of its inactive
subsidiaries, including IRLP, concerning environmental liabilities related to
the Indian Refinery (see Note 14).

        Powerine

        In October 1993, a former subsidiary of the Company purchased Powerine
Oil Company ("Powerine"), the owner of a refinery located in Santa Fe Springs,
California (the "Powerine Refinery"), from MG. On September 29, 1995, Powerine
sold substantially all of its refining plant to Kenyen Projects Limited
("Kenyen"). On January 16, 1996, Powerine merged into a subsidiary of Energy
Merchant Corp. ("EMC"), an unaffiliated entity, and EMC acquired the Powerine
Refinery from

                                      -27-
<PAGE>

                            CASTLE ENERGY CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ("$000'S" OMITTED EXCEPT PER SHARE AMOUNTS)

Kenyen. EMC subsequently sold that refinery to an outside party which, we are
informed, continues to seek financing to restart it.

        As a result of the transactions with American Western, Kenyen and EMC,
the Company's refining subsidiaries disposed of their interests in the refining
business. The results of refining operations were shown as discontinued
operations in the Consolidated Statement of Operations for the year ended
September 30, 1995 and retroactively. Discontinued refining operations have not
impacted operations since fiscal 1995. Amounts on the consolidated balance sheet
reflect the remaining liabilities from discontinued refining operations. Such
amounts remain on the consolidated balance sheet pending final resolution.

        NETWORKED ENERGY LLC

        In August 2000, the Company purchased thirty-five percent (35%) of the
membership interests of Networked Energy LLC ("Network") for $500. Network is a
private company engaged in the operation of energy facilities that supply power,
heating and cooling services directly to retail customers. In March 2002, the
Company invested an additional $150 in Network's equity, increasing its interest
to 45%, and made a $125 loan to Network. In March 2003, the Company recorded a
$480 impairment reserve with respect to its investment in and loan to Network,
reducing the value of same to zero. Network recorded its first revenues and
first profit for the quarter ended September 30, 2004 (see Note 9).

        FUTURE OF THE COMPANY

        After the sale of all of the Company's domestic oil and gas properties
to Delta, the Company's management and Board of Directors were considering
liquidation of the Company and distribution of the Company's assets to its
stockholders. Consideration of liquidation has been suspended as a result of the
lawsuit filed against the Company by ChevronTexaco (see Note 14). As a result of
this lawsuit and management's decision not to liquidate, the Company sought
acquisitions in the energy industry and acquired interests in 166 western
Pennsylvania gas wells in March of 2004 (see Note 4). The Company operates 130
of these 166 wells.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

        GENERAL

        The significant accounting policies discussed are limited to those
applicable to the business segments in which the Company operated during the
fiscal years ended September 30, 2004, 2003 and 2002 - during which time the
Company and its subsidiaries operated only in the exploration and production
segment of the energy business. References should be made to Forms 10-K for
prior periods for summaries of accounting principles applicable to the Company's
discontinued refining operations and the Company's previous natural gas
marketing business.

        PRINCIPLES OF CONSOLIDATION

        The consolidated financial statements presented include the accounts of
the Company and all of its subsidiaries. All intercompany transactions have been
eliminated in consolidation.

        REVENUE RECOGNITION

        Oil and gas revenues are recorded under the sales method when oil and
gas production volumes are delivered to the purchaser. Reimbursement of costs
from well operations is netted against the related oil and gas production
expenses.

        CASH AND CASH EQUIVALENTS

        The Company considers all highly liquid investments, such as time
deposits and money market instruments, purchased with a maturity of three months
or less, to be cash equivalents.

                                      -28-
<PAGE>

                            CASTLE ENERGY CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ("$000'S" OMITTED EXCEPT PER SHARE AMOUNTS)

        MARKETABLE SECURITIES

        The Company currently classifies its investment securities, other than
those accounted for on the equity method, as available-for-sale securities.
Pursuant to Statement of Financial Accounting Standards No. 115 "Accounting for
Certain Investments in Debt and Equity Securities," ("SFAS 115"), such
securities are measured at fair market value in the financial statements with
unrealized gains or losses recorded in other comprehensive income until the
securities are sold or otherwise disposed of. At such time gain or loss is
included in earnings. A decline in the market value of any available-for-sale
security below cost that is deemed to be other than temporary results in a
reduction in the carrying amount to fair value. The impairment is charged to
earnings and a new cost basis for the security results.

        FURNITURE, FIXTURES AND EQUIPMENT

        Furniture, fixtures and equipment are depreciated on a straight-line
basis over periods of three to ten years and rolling stock is depreciated on a
straight-line basis over three years. Such periods are the estimated useful
lives of such furniture, fixtures and equipment.

        OIL AND GAS PROPERTIES

        The Company follows the full-cost method of accounting for oil and gas
properties and equipment costs. Under this method of accounting, all productive
and nonproductive costs incurred in the acquisition, exploration and development
of oil and gas reserves are capitalized. Capitalized costs are amortized on a
composite unit-of-production method by country using estimates of proved
reserves. Capitalized costs which relate to unevaluated oil and gas properties
are not amortized until proved reserves are associated with such costs or
impairment of the related property occurs. Management and drilling fees earned
in connection with the transfer of oil and gas properties to a joint venture and
proceeds from the sale of oil and gas properties are recorded as reductions in
capitalized costs unless such sales are material and involve a significant
change in the relationship between the cost and the value of the remaining
proved reserves, in which case a gain or loss is recognized. The Company
accounts for all unincorporated entities involved in oil and gas exploration and
production using proportionate gross financial presentation. Under the
proportionate gross basis, the Company records its share of assets and
liabilities on the balance sheet and related operating data in its income
statement. Expenditures for repairs and maintenance of wellhead equipment are
expensed as incurred. Net capitalized costs, less related deferred income taxes,
in excess of the present value of net future cash inflows (oil and gas sales
less production expenses) from proved reserves, tax-effected and discounted at
10%, and the cost of properties not being amortized, if any, are charged to
current expense. Amortization and excess capitalized costs, if any, were
computed separately for the Company's investment in Romania, which was sold in
September 2002.

        ENVIRONMENTAL COSTS

        The Company is subject to extensive federal, state and local
environmental laws and regulations. These laws, which are constantly changing,
regulate the discharge of materials into the environment and may require the
Company to remove or mitigate the environmental effects of the disposal or
release of petroleum or chemical substances at various sites. Environmental
expenditures are expensed or capitalized depending on their future expected
economic benefit to the Company. Expenditures that relate to an existing
condition caused by past operations and that have no future economic benefits
are expensed. Liabilities for expenditures are recorded when environmental
assessment and/or remediation is probable and the costs can be reasonably
estimated. Environmental liabilities are accrued on an undiscounted basis unless
the aggregate amount of the obligation and the amount and timing of the cash
payments are fixed and reliably determined for that site.

        Contingent environmental liabilities are recorded at their estimated
settlement values, including estimated legal costs to contest such liabilities.

        IMPAIRMENT OF LONG-TERM ASSETS

        The Company reviews its long-term assets other than oil and gas
properties for impairment whenever events or changes in circumstances indicated
that the carrying amount of an asset might not be recoverable. If the sum of the
expected future

                                      -29-
<PAGE>

                            CASTLE ENERGY CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ("$000'S" OMITTED EXCEPT PER SHARE AMOUNTS)

cash flows expected to result from the use of the asset and its eventual
disposition are less than the carrying amount of the asset, an impairment loss
is recognized. Measurement of an impairment loss is based on the fair market
value of the asset. Impairment for oil and gas properties is computed in the
manner described above under "Oil and Gas Properties."

        HEDGING ACTIVITIES

        The Company has not used hedges during the periods reported.

        GAS BALANCING

        The Company follows the "sales method" of accounting for its natural gas
and crude oil revenue, so that the Company recognizes sales revenue on all
natural gas or crude oil sold to its purchasers, regardless of whether the sales
are proportionate to the Company's ownership in the property. A receivable or
liability is recognized only to the extent that the Company has an imbalance on
a specific property greater than the expected remaining proved reserves. Gas
balancing activities have been immaterial during the periods reported.

        ASSET RETIREMENT OBLIGATIONS

        In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS No. 143"), which provides accounting requirements
for retirement obligations associated with tangible long-lived assets,
including: 1) the timing of liability recognition; 2) initial measurement of the
liability; 3) allocation of asset retirement costs to expense; 4) subsequent
measurement of the liability; and 5) financial statement disclosures.
SFAS No. 143 requires that asset retirement cost be capitalized as part of the
cost of the related long-lived asset and subsequently allocated to expense using
a systematic and rational method. Any transition adjustment resulting from the
adoption of SFAS No. 143 would be reported as a cumulative effect of a change in
accounting principle. The Company adopted this statement effective October 1,
2002. The adoption of this statement did not have a material impact on the
Company's consolidated financial statements. The Company recorded an asset
retirement obligation of $222 in conjunction with its acquisition of interests
in gas wells on March 31, 2004 (see Note 4). At September 30, 2004, the asset
retirement obligation was $230 with the change for the period resulting from
accretion expense.

        INVESTMENTS IN NETWORK AND DELTA

        The Company's investments in Network and Delta (the Company owned 45% of
Network and approximately 17.8% of Delta at September 30, 2004) are recorded
using the equity method. Under this method, the Company records its share of
Network's and Delta's income or loss and other comprehensive income (loss) with
an offsetting entry to the carrying value of the Company's investment. Cash
distributions, if any, are recorded as reductions in the carrying value of the
Company's investment. If Network or Delta issues additional equity at prices
different than that of the Company's investment, the Company records such
difference, net of tax, as a charge or credit to the Company's investment with
the offsetting entry to "Paid-In-Capital."

        At March 31, 2003, the Company recorded a $480 impairment provision
related to its investment in Network, reducing the book value of such investment
to zero. (See Note 9).

        Although the Company's interest in Delta has decreased below 20%, the
Company has continued to account for its investment in Delta using the equity
method because three of the Company's directors currently comprise one-third of
Delta's directors and thus the Company can be deemed to still exercise
significant influence on Delta. If the Company's influence in Delta continues to
decrease to a level at which it no longer is considered to have a significant
influence, the Company would record its investment as a marketable security
using the provisions of SFAS No. 115.

        The Company's investment in Delta exceeds the Company's proportional
share of Delta's equity. The Company has allocated such excess to Delta's
ownership interests in offshore California leases and the related potential
legal recovery from a lawsuit Delta and other owners of offshore California
leases have instituted against the United States for breach of contract. The
ownership interests are considered an intangible asset and the Company is
required to evaluate the recoverability of such asset periodically and write
them off or reduce them to the extent they are not deemed recoverable. (See
Note 10.)

                                      -30-
<PAGE>

                            CASTLE ENERGY CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ("$000'S" OMITTED EXCEPT PER SHARE AMOUNTS)

        If Delta incurs significant recurring losses in the future and/or the
market value of its stock declines significantly, the Company's investment in
Delta may be considered to have incurred an other than temporary impairment and
the Company would then be required to recognize such impairment.

        COMPREHENSIVE INCOME

        Comprehensive income includes net income and all changes in an
enterprise's other comprehensive income including, among other things,
unrealized gains and losses on certain investments in debt and equity
securities.

        STOCK BASED COMPENSATION

        SFAS No. 123, "Accounting for Stock-Based Compensation," allows an
entity to continue to measure compensation costs in accordance with Accounting
Principle Board Opinion No. 25 ("APB 25"). The Company has elected to continue
to measure compensation cost in accordance with APB 25 and to comply with the
required disclosure-only provisions of SFAS 123.

        Proforma net income and earnings per share had the Company accounted for
its options under the fair value method of SFAS 123 is as follows:

<TABLE>
<CAPTION>
                                                                     YEAR ENDING SEPTEMBER 30,
                                                             -------------------------------------------
                                                                 2004           2003            2002
                                                             ------------   ------------    ------------
        <S>                                                  <C>            <C>             <C>
        Net income (loss) as reported ....................   $     13,620   $     (2,001)   $     (1,844)
        Adjustment required by SFAS 123 ..................                                           (62)
                                                             ------------   ------------    ------------
        Pro-forma net income (loss) ......................   $     13,620   $     (2,001)   $     (1,906)
                                                             ============   ============    ============
        Pro-forma net income (loss) per share:
          Basic ..........................................   $       2.04   $      (0.30)   $      (0.29)
                                                             ============   ============    ============
          Diluted ........................................   $       1.96   $      (0.30)   $      (0.29)
                                                             ============   ============    ============
        Net income (loss) per share as reported:
          Basic ..........................................   $       2.04   $      (0.30)   $      (0.28)
                                                             ============   ============    ============
          Diluted ........................................   $       1.96   $      (0.30)   $      (0.28)
                                                             ============   ============    ============
</TABLE>

        INCOME TAXES

        The Company follows Statement of Financial Accounting Standards No. 109
"Accounting for Income Taxes" ("SFAS No. 109 "). SFAS No. 109 requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been recognized in the Company's financial
statements and tax returns. In estimating future tax consequences, SFAS No. 109
generally considers all expected future events other than anticipated enactments
of changes in the tax law or tax rates. SFAS No.109 also requires that deferred
tax assets, if any, be reduced by a valuation allowance based upon whether
realization of such deferred tax asset is or is not more likely than not. (See
Note 19).

        DERIVATIVE INSTRUMENTS

        Statement of Financial Accounting Standards No. 133, as amended,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"),
was issued by the Financial Accounting Standards Board in June 1998.
Subsequently, SFAS No. 138 "Accounting for Certain Derivative Instruments"
(SFAS No. 138), an amendment of SFAS No. 133, was issued. SFAS 133 standardizes
the accounting for derivative instruments, including certain derivative
instruments embedded in other contracts. Under the standard, entities are
required to carry all derivative instruments in the statement of financial
position at fair value. The Company adopted SFAS No. 133 effective October 1,
2000. In May 2002, the Company assigned to Delta an option to acquire 3,188,667
of its shares held by the Company for $4.50/share until May 31, 2003. Pursuant
to SFAS No. 133, the Company accounted for changes in the value of this option
by recording gains or losses, as applicable, in its Consolidated Statement of
Operations until the option expired unexercised on May 31, 2003. The Company has
not hedged its oil and gas production during the periods reported.

                                      -31-
<PAGE>

                            CASTLE ENERGY CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ("$000'S" OMITTED EXCEPT PER SHARE AMOUNTS)

        RECLASSIFICATIONS

        Certain reclassifications have been made to make the periods presented
comparable.

        USE OF ESTIMATES

        The preparation of financial statements in accordance with generally
accepted accounting principles in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from these
estimates.

        NEW ACCOUNTING PRONOUNCEMENTS

        In December 2003, the FASB issued revised Interpretation No. 46,
"Consolidation of Variable Interests Entities , an Interpretation of ARB No. 51
("Interpretation No 46R"). Interpretation No. 46R applies immediately to
variable interests in variable interest entities created after January 31, 2003,
and to variable interests in variable interest entities obtained after January
31, 2003. For public enterprises with a variable interest in a variable interest
entity created before February 1, 2003, the Interpretation applies to that
enterprise no later than the end of the first interim or annual reporting period
ending after March 31, 2004. The provisions of Interpretation No. 46R have not
had an effect on the Company's financial position and results of operations to
date, and the Company does not presently expect Interpretation No. 46 to have
any effect on the Company's future financial position or results of operations.

        On September 28, 2004, the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 106 ("SAB No. 106"). SAB No. 106 applies to
companies using the full cost method of accounting for oil and gas properties
and equipment costs, such as the Company. SAB No. 106 is expected to affect the
way in which the Company calculates its full cost ceiling limitation (the
Company will henceforth exclude asset retirement costs related to proved
developed properties in the calculation of the ceiling) and the way the Company
calculates depletion on its gas properties (only asset retirement costs for new
recompletions and new wells will be included in calculating depletion rates).
The Company adopted SAB No. 106 on October 1, 2004. The Company expects the
adoption of SAB No. 106 on future operating costs, operating income (loss) and
net income (loss) to be immaterial.

        In December 2004, the FASB issued Statement of Financial Accounting
Standards No. 123 (revised 2004), "Share- Based Payment" ("SFAS No. 123(R)").
SFAS No. 123(R) requires an entity to recognize the grant-date fair value of
stock options and other equity-based compensation issued to employees in the
income statement. SFAS No. 123(R) will be effective for the Company beginning
July 1, 2005. The Company does not expect SFAS No. 123(R) to have a material
impact on its results of operations.

        In December 2004, the FASB issued FASB Staff Position FAS 109-1,
"Application of FASB Statement No. 109, Accounting for Income Taxes, for the Tax
Deduction Provided to U.S. Based Manufacturers by the American Jobs Creation Act
of 2004" (FSP 109-1). FSP 109-1 clarifies how to apply Statement No. 109 to the
new law's tax deduction for income attributable to "domestic production
activities." The Company is currently evaluating the impact of the new law.

                                      -32-
<PAGE>

                   CASTLE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     ("$000'S" OMITTED EXCEPT SHARE AMOUNTS)

NOTE 3 - DISCONTINUED REFINING OPERATIONS

        Effective September 30, 1995, the Company's refining subsidiaries
discontinued their refining operations.

        An analysis of the assets and liabilities related to the refining
segment for the period October 1, 2001 to September 30, 2004 is as follows:

<TABLE>
<CAPTION>
                                                                          ESTIMATED
                                                                      REALIZABLE VALUE
                                                                       OF DISCONTINUED          NET REFINING
                                                                     NET REFINING ASSETS    LIABILITIES RETAINED
                                                                     -------------------    --------------------
        <S>                                                                <C>                    <C>
        Balance - October 1, 2001.................................         $   612                $ 3,016
        Adjustment of liabilities.................................                                   (106)
        Cash transactions.........................................                                    106
                                                                           -------                -------
        Balance - September 30, 2002..............................             612                  3,016
        Adjustment of liabilities.................................             (13)                  (151)
        Cash transactions.........................................            (599)                  (461)
                                                                           -------                -------
        Balance - September 30, 2003 and 2004.....................         $     0                $ 2,404
                                                                           =======                =======
</TABLE>

        As of September 30, 2004, the estimated value of net refining
liabilities retained consisted of net vendor liabilities of $1,099, outstanding
and accrued legal costs of $192 and accrued costs related to discontinued
refining operations of $1,138, offset by cash of $25.

        "Estimated realizable value of discontinued net refining assets" is
based on the transactions consummated by the Company with American Western and
transactions consummated by American Western and IRLP subsequently with others
and includes management's best estimates of the amounts expected to be realized
upon the complete disposal of the refining segment. "Net refining liabilities
retained" includes management's best estimate of amounts expected to be paid
upon the settlement of this net liability. The actual amounts the Company
ultimately pays could differ materially from such estimated amounts.

        See Note 14.

NOTE 4 - ACQUISITIONS AND DISPOSITIONS

        Investment in Romanian Concessions

        In April 1999, the Company purchased an option to acquire a fifty
percent (50%) interest in three oil and gas concessions granted to a subsidiary
of Costilla Energy Corporation, a public oil and gas exploration and production
company ("Costilla"), by the Romanian government. The Company paid Costilla $65
for the option. In May 1999, the Company exercised the option. As of
September 30, 2001, the Company had participated in the drilling of five onshore
wildcat wells. Four of those wells resulted in dry holes. Although the fifth
well produced some volumes of natural gas when tested, the Company was not able
to obtain a sufficiently high gas price to justify future production and elected
not to undertake an offset drilling program where the fifth well was drilled. As
a result, the Company recorded impairment provisions of $2,765 and $832 for the
years ended September 30, 2001 and 2000, respectively, for costs incurred for
the five onshore wells. In fiscal 2001, the Company also agreed to participate
in the drilling of a sixth well offshore in the Black Sea. In August 2002, the
Company purchased a 12.5% net profit interest in the Company's 50% interest in
the Romanian concessions from an unaffiliated company for $8. On September 6,
2002, the Company sold all of its interests in Romania to the operator of the
Romanian concessions for one dollar, resulting in a loss on the sale of $311.

        On May 31, 2002, the Company consummated the sale of all of its domestic
oil and gas properties to Delta. The sale was pursuant to a definitive purchase
and sale agreement dated January 15, 2002. At closing, the Company received
$18,236 cash plus 9,566,000 shares of Delta's common stock. The $18,236 cash
represented a $20,000 purchase price cash component

                                      -33-
<PAGE>

                   CASTLE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     ("$000'S" OMITTED EXCEPT SHARE AMOUNTS)

as of October 1, 2001, the effective date of the sale, less $1,764 of net cash
flow received by the Company applicable to production from the properties
subsequent to the effective date. It did not include an estimated $2,564 of net
production revenue (oil and gas sales less oil and gas production expenses)
applicable to production subsequent to October 1, 2001 that the Company did not
receive but has been or will be received by Delta. In September 2002, the
Company paid Delta an additional $194, as the final purchase price adjustment,
resulting in net cash proceeds of $18,042. Pursuant to the governing purchase
and sale agreement, the Company granted Delta an option to repurchase up to
3,188,667 of Delta's shares at $4.50/share for a period of one year after
closing. That option was valued at $2,682 at May 31, 2002 using the Black
Scholes method. The Delta stock received by the Company was valued at $26,952
based upon an evaluation by an independent appraiser, excluding the value of the
option granted to Delta. The value of the 9,566,000 shares of Delta stock was
based upon a share price of $4.025, the average price on the closing date, May
31, 2002, discounted by 30%. The Company believes that the 30% discount to the
traded price is reasonable due to the illiquidity of Delta's stock and other
factors. As a result of the sale, the Company owned approximately 44% of Delta,
which was accounted for under the equity method effective May 31, 2002.

        For book purposes, the Company recorded a gain on the sale of its
domestic oil and gas properties to Delta of $1,295 as follows:

<TABLE>
        <S>                                                                             <C>         <C>
        Proceeds received
          Cash price at October 1, 2001, effective date...........................      $  20,000
          Cash flow received by the Company October 1, 2001-May 31 2002...........         (1,764)
          Final purchase price adjustment.........................................           (194)
          Estimated production revenue earned by the Company October 1,
           2001 to May 31, 2002 but received by or to be received by Delta......           (2,564)
                                                                                        ---------
                                                                                                       15,478
          Value of Delta stock received per appraisal (9,566,000 shares x
           $2.8175/share).......................................................                       26,952
                                                                                                    ---------
                                                                                                       42,430
        Net book value of assets sold:
          Oil and gas properties..................................................                    (37,388)
          Pipeline................................................................                       (48)
                                                                                                    ---------
        Gross gain on sale........................................................                      4,994
        Estimated value of Delta option to repurchase 3,188,667 shares............                     (2,682)
                                                                                                    ---------
        Net gain on sale..........................................................                      2,312
        Portion of gain deferred (approximately 44%)..............................                     (1,017)
                                                                                                    ---------
        Net gain recorded.........................................................                  $   1,295
                                                                                                    =========
</TABLE>

        Under generally accepted accounting principles, the Company's gross gain
on the sale is reduced by the fair value of Delta's option, which was computed
using the Black Scholes method. In addition, a portion of the net gain on the
sale, equal to the Company's ownership interest in Delta after the transaction,
was deferred and offset against the Company's investment in Delta in accordance
with generally accepted accounting principles in the United States. The
Company's investment in Delta at May 31, 2002, the closing date, was as follows:

<TABLE>
        <S>                                                                                         <C>
        Book value of the Company's initial investment in Delta (382,289 shares) prior
         to May 31, 2002.................................................................           $   1,733
        Reduction of initial investment to market value upon conversion to equity
         method of accounting............................................................                (184)
        "Catch up" adjustment necessary to convert the Company's initial
         investment in Delta to the equity method retroactively..........................                (165)
        Value of Delta stock received in Delta transaction (9,566,000 shares)............              26,952
        Portion of gain deferred (approximately 44%).....................................              (1,017)
                                                                                                    ---------
                                                                                                    $  27,319
                                                                                                    =========
</TABLE>

                                      -34-
<PAGE>

                   CASTLE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     ("$000'S" OMITTED EXCEPT SHARE AMOUNTS)

        Prior to May 31, 2002, the Company owned 382,289 shares of Delta, which
represented approximately 3.4% of Delta. At May 31, 2002, the Company was
required to account for its initial investments under the equity method.

        Under generally accepted accounting principles in the United States, an
adjustment was first made to reduce the Company's cost of Delta's stock to its
market value before such market value was added to the Company's equity
investment in Delta. Next, an adjustment was made to record the Company's share
of Delta's net income (loss) under the equity method retroactively ("catch up"
adjustment).

        The Company's investment in Delta exceeded its proportional share of
Delta's equity by approximately $6,900 at closing, May 31, 2002. The Company
allocated the excess to Delta's ownership interests in offshore California
leases and the related potential legal recovery from its offshore California oil
and gas leases. Delta and eight other energy companies which own interests in
oil and gas leases off the California coast have sued the United States for in
excess of $1,200,000 for reimbursement damages for breach of contract with
respect to these offshore oil and gas fields.

        On March 31, 2004, the Company acquired interests in 138 western
Pennsylvania gas wells from Delta. The Company previously owned most of these
properties through May 31, 2002 when it sold all of its United States oil and
gas properties to Delta. The purchase price paid by the Company was $8,121
consisting of $8,000 for the agreed-upon purchase price as of January 1, 2004
plus $121 of net expenses paid by Delta applicable to the period January 1, 2004
to March 31, 2004. The effective date of the purchase was January 1, 2004. For
accounting purposes the Company allocated $43 of the purchase price to trucks
and the remainder to oil and gas properties.

        The Company owned approximately 25% of Delta (see Note 10) at the time
of purchase and three of the Company's directors were and still are also
directors of Delta. Prior to approving the purchase, the Company appointed a
committee of independent directors to evaluate and make a recommendation to the
Board of Directors with respect to the proposed transaction. The Committee
engaged an outside consultant to evaluate the fairness of the proposed purchase.
Based upon that consultant's recommendation that the purchase price was
reasonable and fair and the favorable recommendation of the committee, the full
Board of Directors of the Company unanimously approved the transaction.

        At the same time the Company also purchased another owner's interests in
the same gas properties for $334 subject to similar final closing adjustments.
The other owner's interests in the properties were approximately four percent of
Delta's interests in the same properties.

        On March 30, 2004, the Company acquired interests in 28 western
Pennsylvania gas wells for $1,100 from five limited partnerships. That
transaction closed March 30, 2004. The President of the general partner of the
five selling limited partnerships was and still is an officer and director of
the Company. As a result, the Company appointed a committee of independent
directors to evaluate and make recommendations to the Board with respect to the
proposed transaction. The committee engaged an outside consultant to evaluate
the fairness of the proposed purchase. Based upon that consultant's opinion that
the proposed purchase price was reasonable and fair and the favorable
recommendation of the committee, the full Board of Directors of the Company
unanimously approved the transaction.

        The Company's petroleum reservoir engineer estimated the proved reserves
applicable to the three Pennsylvania purchases to be approximately eight billion
cubic feet of natural gas, of which approximately 87% represents proved
producing reserves, while the remaining 13% represents behind pipe and
undeveloped reserves. Approximately 130 of 166 wells in which the Company
acquired interests are operated by the Company. The Company also entered into an
operations management agreement with Delta whereby Delta agreed to perform
certain well operations functions for the Company on a transitional basis for up
to six months commencing April 1, 2004. That agreement terminated September 30,
2004 and the Company is now performing the well operations functions previously
performed by Delta.

                                      -35-
<PAGE>

                   CASTLE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     ("$000'S" OMITTED EXCEPT SHARE AMOUNTS)

        The Company's investment in proved oil and gas properties at September
30, 2004 is as following:

<TABLE>
        <S>                                                                             <C>         <C>
        Purchase price paid at closing (March 30 and 31, 2004):
          Purchase of interests in 138 wells from Delta ($8,121 less $43
           allocated to trucks)...................................................      $   8,078
          Purchase of interests in same 138 wells from an outside party...........            334
          Purchase of interests in additional 28 wells from limited partnerships..          1,100
                                                                                        ---------

                                                                                                    $   9,512
        Final purchase price adjustments..........................................                       (527)
        Asset retirement obligation...............................................                        222
        Accumulated depreciation, depletion and amortization......................                       (195)
                                                                                                    ---------
                                                                                                    $   9,012
                                                                                                    =========
</TABLE>

        At September 30, 2004, $356 of the final purchase price adjustments were
still owed to the Company by two asset sellers.

        See Notes 8 and 10.

NOTE 5 - RESTRICTED CASH

        Restricted cash consists of the following:

<TABLE>
<CAPTION>
                                                                                            SEPTEMBER 30,
                                                                                        ---------------------
                                                                                           2004        2003
                                                                                        ---------   ---------
        <S>                                                                             <C>         <C>
        Funds supporting letters of credit issued for operating bonds.............      $     120   $     210
        Funds supporting bond posted for Long Trusts Lawsuit, including
         accrued interest of $189 at September 30, 2003...........................                      4,075
                                                                                        ---------   ---------
                                                                                        $     120   $   4,285
                                                                                        =========   =========
</TABLE>

NOTE 6 - MARKETABLE SECURITIES

        The Company's investment in marketable securities consists of common
shares of Penn Octane Corporation, a public company that sells liquid propane
gas into Mexico ("Penn Octane"), and ChevronTexaco Corporation
("ChevronTexaco"). The Company sold all of its shares of Penn Octane common
stock during the quarter ended March 31, 2004 resulting in a gain of $538. The
Company's investments in Penn Octane and ChevronTexaco common stock and options
to buy Penn Octane common stock were as follows:

<TABLE>
<CAPTION>
                                                                                              COMMON STOCK
                                                                                -------------------------------------
                                                                                PENN OCTANE   CHEVRONTEXACO    TOTAL
                                                                                -----------   -------------   -------
        <S>                                                                       <C>           <C>           <C>
        September 30, 2004:
          Cost...........................................................                       $    15       $    15
          Unrealized gain (loss).........................................                             4             4
                                                                                                -------       -------
          Book value (market value)......................................                       $    19       $    19
                                                                                                =======       =======
        September 30, 2003:
          Cost...........................................................         $   2,271     $    14       $ 2,285
          Unrealized gain (loss).........................................             1,804          (1)        1,803
                                                                                  ---------     -------       -------
          Book value (market value)......................................         $   4,075     $    13       $ 4,088
                                                                                  =========     =======       =======
</TABLE>

        The fair market values of Penn Octane and ChevronTexaco common stock
were based on one hundred percent (100%) of the closing price on the last
trading day in the Company's fiscal year.

                                      -36-
<PAGE>

                   CASTLE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     ("$000'S" OMITTED EXCEPT SHARE AMOUNTS)

        At September 30, 2003, the fair market value of the Penn Octane shares
included $45 related to options to acquire Penn Octane common stock held by the
Company. The value of such options was computed using the Black-Scholes method.
The options expired unexercised.

NOTE 7 - ACCOUNTS RECEIVABLE

        Accounts receivable consists of the following:

                                                             SEPTEMBER 30,
                                                         ---------------------
                                                            2004        2003
                                                         ---------   ---------
        Gas production revenues.....................     $     495
        Purchase price adjustments..................            17
        Other.......................................            70   $     152
                                                         ---------   ---------
                                                         $     582   $     152
                                                         =========   =========

NOTE 8 - ACCOUNTS RECEIVABLE - DELTA PETROLEUM CORPORATION

        Account receivable - Delta Petroleum Corporation consists of the final
purchase price adjustment related to the Company's acquisition of Appalachian
gas properties from Delta (see Notes 4 and 10). The parties have agreed to this
amount. At September 30, 2004, the Company owned 17.8% of Delta.

NOTE 9 - INVESTMENT IN NETWORKED ENERGY LLC AND NOTE RECEIVABLE DUE FROM
NETWORKED ENERGY LLC

        The Company accounts for its investment in Network using the equity
method of accounting (see Note 2). In fiscal 2002 the Company invested an
additional $150 in Network increasing its ownership from 35% to 45%. In
addition, the Company loaned Network $125 in fiscal 2003. The Company recorded a
$354 impairment provision on its investment in Network's equity and a $126
allowance for doubtful accounts on its note receivable from Network at March 31,
2003 because Network had not obtained any contracts for the services its offers.
These impairment provisions reduced the book value of the Company's investment
in Network to zero and the Company no longer recorded any portion of Network's
losses after March 31, 2003. The Company's investment in Network as of September
30, 2004 and 2003 was as follows:

<TABLE>
<CAPTION>
                                                                                      NOTE
                                                                      INVESTMENT   RECEIVABLE
                                                                      ----------   ----------
        <S>                                                           <C>          <C>
        Investment in Network's Equity..............................  $      650
        Note receivable - Network...................................               $      125
        Accumulated amortization of goodwill........................         (23)
        Accumulated share of Network's losses.......................        (273)
        Impairment provision........................................        (354)
        Accrued interest receivable.................................                        1
        Allowance for doubtful account..............................                     (126)
                                                                      ----------   ----------

                                                                      ==========   ==========
</TABLE>

                                      -37-
<PAGE>

                   CASTLE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     ("$000'S" OMITTED EXCEPT SHARE AMOUNTS)

        The components of the Company's equity in Network losses are as follows:

<TABLE>
<CAPTION>
                                                                                    YEAR ENDED SEPTEMBER 30,
                                                                                   --------------------------
                                                                                    2004       2003      2002
                                                                                   -----      -----     -----
        <S>                                                                        <C>        <C>       <C>
        Share of Network's losses, excluding amortization of goodwill.........                $  20     $ 167
        Amortization of goodwill..............................................                              9
                                                                                              -----     -----
                                                                                              $  20     $ 176
                                                                                              =====     =====
</TABLE>

        For the period from April 1, 2003 to September 30, 2003, Network
recorded a loss of $13, no portion of which was recorded by the Company. For the
period from October 1, 2003 to September 30, 2004, Network recorded a loss of
$4, no portion of which was recorded by the Company. The Company does not expect
to record any share of any future income of Network until such income exceeds
the $17 of losses incurred by Network from April 1, 2003 to September 30, 2004.
Network recorded its first revenue and profit during the quarter ended September
30, 2004.

        Network's membership units are held by the Company and one other member
who owns 55% of Network. The membership interests are not publicly traded.

        See Notes 1 and 2.

NOTE 10 - INVESTMENT IN DELTA PETROLEUM CORPORATION

        Changes in the Company's investment in Delta were as follows:

<TABLE>
<CAPTION>
                                                                                             YEAR ENDED SEPTEMBER 30,
                                                                                             ------------------------
                                                                                                2004          2003
                                                                                             ----------    ----------
        <S>                                                                                  <C>           <C>
        Investment - beginning of period..................................................   $   29,477    $   26,886
        Share of Delta's income (losses)..................................................        1,352         1,067
        Share of Delta's other comprehensive income (loss)................................          (92)          359
        Tax effect on share of Delta's other comprehensive income (loss)..................           32            91
        Issuance of additional Delta shares to outsiders at a price different than the
         Company's book value.............................................................       20,054         1,074
        Sale of Delta shares to outsiders.................................................      (11,128)
        Other.............................................................................            3
                                                                                             ----------    ----------
        Investment end of period..........................................................   $   39,698    $   29,477
                                                                                             ==========    ==========
</TABLE>

        The Company currently accounts for its investment in Delta using the
equity method of accounting. Prior to June 1, 2002, the Company accounted for
its interest in Delta as available-for-sale securities. At September 30, 2004,
the Company owned 17.8% of Delta's common stock, consisting of 7,000,000 shares.
Prior to June 1, 2002, the Company owned approximately 3.4% of Delta.

        The difference between the Company's investment in Delta and its
proportional share of Delta's equity was approximately $4,000 at September 30,
2004. The Company has allocated the excess to Delta's ownership interests in
offshore California leases and the related potential legal recovery from Delta's
offshore California oil and gas leases.

        See Notes 2 and 4.

                                      -38-
<PAGE>

                   CASTLE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     ("$000'S" OMITTED EXCEPT SHARE AMOUNTS)

        Condensed financial information concerning Delta is as follows:

<TABLE>
<CAPTION>
                                                                                            SEPTEMBER 30,
                                                                                        ---------------------
                                                                                           2004        2003
                                                                                        ---------   ---------
                                                                                             (Unaudited)
        <S>                                                                             <C>         <C>
                                CONDENSED BALANCE SHEETS

                                         Assets

        Current assets..........................................................        $  15,896   $   7,456
        Property and equipment, net.............................................          261,907      93,198
        Other assets............................................................            1,330         195
                                                                                        ---------   ---------
                                                                                        $ 279,133   $ 100,849
                                                                                        =========   =========

                          Liabilities and Stockholders' Equity

        Current liabilities, including current portion of long-term debt........        $  15,177   $  18,029
        Long-term liabilities and minority interests............................           63,445      27,555
        Shareholder's equity....................................................          200,511      55,265
                                                                                        ---------   ---------
                                                                                        $ 279,133   $ 100,849
                                                                                        =========   =========
</TABLE>

<TABLE>
<CAPTION>
                                                                                 SEPTEMBER 30,
                                                                    --------------------------------------
                                                                       2004          2003          2002
                                                                    ----------    ----------    ----------
                                                                                 (Unaudited)
                    CONDENSED STATEMENTS OF OPERATIONS
        <S>                                                         <C>           <C>           <C>
        Revenue:
          Oil and gas sales .....................................   $   49,387    $   27,850    $   11,172
          Other .................................................         (428)       (2,074)          243
                                                                    ----------    ----------    ----------
                                                                        48,959        25,776        11,415
                                                                    ----------    ----------    ----------
        Expense:
          Lease operating expenses ..............................       11,865         9,579         5,877
          General and administrative ............................        9,514         5,368         3,833
          Depreciation, depletion and amortization ..............       13,344         5,797         4,239
          Other .................................................        7,920           800         1,998
                                                                    ----------    ----------    ----------
                                                                        42,643        21,544        15,947
                                                                    ----------    ----------    ----------
        Other income (loss) .....................................       (1,849)       (1,728)       (1,360)
                                                                    ----------    ----------    ----------
        Income (loss) before taxes ..............................        4,467         2,504        (5,892)
        Income taxes
        Discontinued operations, net of tax .....................        3,169
                                                                    ----------    ----------    ----------
        Net income (loss) .......................................   $    7,636    $    2,504    $   (5,892)
                                                                    ==========    ==========    ==========
</TABLE>

        The above condensed financial information has been compiled using
Delta's audited financial statements for the years ended June 30, 2004, 2003 and
2002 and its unaudited quarterly financial statements for the quarters ended
September 30, 2001, 2002, 2003 and 2004.

        Delta' stock is traded on the Nasdaq stock market under the symbol
"DPTR." At September 30, 2004, the closing price of Delta's common stock was
$13.04.

        At June 30, 2004, there were 4,758,000 options and warrants to acquire
Delta's stock outstanding, including options and warrants that are out of the
money. The Company holds none of these options and warrants. If all such options
and warrants had been exercised at September 30, 2004, the Company's percentage
ownership of Delta would have decreased to approximately 16%.

                                      -39-
<PAGE>

                   CASTLE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     ("$000'S" OMITTED EXCEPT SHARE AMOUNTS)

        At September 30, 2003, the Company owned 9,948,289 shares of Delta. In
March and May 2004, the Company sold 2,948,289 shares of Delta for net proceeds
of $29,339 and recognized a gain of $18,211 on the sale. The book value of the
shares sold was based upon the book value per share of the Company's investment
in Delta on the day of sale.

        When the Company sold substantially all of its assets to Delta in May
2002, it valued the 9,566,000 Delta shares it received at $2.82 per share.
Subsequently, the Company has increased its investment in Delta by its share of
Delta's earnings and by its share of gains related to subsequent stock issuances
by Delta at prices in excess of the Company's book value/share of Delta in
accordance with the equity method of accounting. The Company's accounting policy
is to record these gains through equity and not as income. As a result, the
average cost of the 2,948,289 shares of Delta sold by the Company during the
year ended September 30, 2004 was $3.77 per share and the average book value of
the Company's remaining 7,000,000 Delta shares at September 30, 2004 was $5.67
per share.

NOTE 11 - FURNITURE, FIXTURES AND EQUIPMENT

        Furniture, fixtures and equipment are as follows:

                                                             SEPTEMBER 30,
                                                         ---------------------
                                                            2004        2003
                                                         ---------   ---------
        Cost:
          Furniture and fixtures......................   $     690   $     668
          Automobiles and trucks......................         349         269
                                                         ---------   ---------
                                                             1,039         937
        Accumulated depreciation......................        (928)       (872)
                                                         ---------   ---------
                                                         $     111   $      65
                                                         =========   =========

NOTE 12 - OIL AND GAS PROPERTIES (UNAUDITED)

        Oil and gas properties consist of the following:

                                                              SEPTEMBER 30, 2004
                                                              ------------------
        Proved properties...................................       $  9,207
        Less: accumulated depreciation, depletion
         and amortization...................................           (195)
                                                                   --------
                                                                   $  9,012
                                                                   ========

        The Company owned no oil and gas properties at September 30, 2003 (see
Note 1 and 4). As required by SFAS No. 69 "Disclosure About Oil and Gas
Producing Activities," the Company has also presented information concerning its
interest in Delta's oil and gas operations.

        The Company's 17.8% interest in Delta's net capitalized costs at
September 30, 2004 was $46,619 (unaudited).

        Capital costs incurred by the Company in oil and gas activities are as
follows:

                                                   YEAR ENDED SEPTEMBER 30,
                                              ----------------------------------
                                                2004             2002
                                              -------  -------------------------
                                              UNITED   UNITED
                                              STATES   STATES   ROMANIA   TOTAL
                                              -------  -------  -------  -------
        Acquisition of properties:
          Proved properties................   $ 8,985
          Unproved properties..............            $   154  $   221  $   375
        Exploration........................
        Development........................                434               434
                                              -------  -------  -------  -------
                                              $ 8,985  $   588  $   221  $   809
                                              =======  =======  =======  =======

                                      -40-
<PAGE>

                   CASTLE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     ("$000'S" OMITTED EXCEPT SHARE AMOUNTS)

        No capital costs were incurred by the Company in oil and gas activities
for the year ended September 30, 2003.

        For the years ended September 30, 2002, the Company incurred development
costs related to booked proved undeveloped reserves of $434. No development
costs were incurred for the years ended September 30, 2003 and 2004.

        The Company's 17.8% interest in Delta's costs of property acquisition,
exploration and development are as follows:

<TABLE>
<CAPTION>
                                                                                       YEAR ENDED JUNE 30, 2004
                                                                                   -------------------------------
                                                                                    ONSHORE    OFFSHORE     TOTAL
                                                                                   --------    --------   --------
        <S>                                                                        <C>         <C>        <C>
        Acquisition of properties:
          Proved properties ....................................................   $ 22,888               $ 22,888
          Unproved properties ..................................................      6,626    $    121      6,747
        Exploration ............................................................        428                    428
        Development ............................................................      4,410         190      4,600
                                                                                   --------    --------   --------
                                                                                   $ 34,352    $    311   $ 34,663
                                                                                   ========    ========   ========
        Company's interest in Delta ............................................                              17.8%
                                                                                                          ========
</TABLE>

<TABLE>
<CAPTION>
                                                                       YEAR ENDED SEPTEMBER 30,
                                                -----------------------------------------------------------------
                                                              2003                              2002
                                                --------------------------------   ------------------------------
                                                ONSHORE     OFFSHORE      TOTAL    ONSHORE    OFFSHORE     TOTAL
                                                --------    --------    --------   --------   --------   --------
        <S>                                     <C>         <C>         <C>        <C>        <C>        <C>
        Acquisition of properties:
          Proved properties .................   $  4,421                $  4,421   $ 16,848              $ 16,848
          Unproved properties ...............        285    $    181         466      4,011   $    160      4,171
        Exploration .........................         58                      58         48         21         69
        Development .........................      2,112         404       2,516        434        527        961
                                                --------    --------    --------   --------   --------   --------
                                                $  6,876    $    585    $  7,461   $ 21,341   $    708   $ 22,049
                                                ========    ========    ========   ========   ========   ========
        Company's interest in Delta .........                                 41%                              44%
                                                                        ========                         ========
</TABLE>

        All of Delta's offshore properties are located in offshore California.

        The Company's 17.8% interest in Delta's property acquisition,
exploration and development costs incurred in oil and gas activities is
presented for annual periods ending June 30 because this is Delta's fiscal year
end.

        Results of operations, excluding corporate overhead and interest
expense, from the Company's oil and gas producing activities are as follows:

<TABLE>
<CAPTION>
                                                                                   YEAR ENDED SEPTEMBER 30,
                                                                                   ------------------------
                                                                                      2004          2002
                                                                                   ----------    ----------
        <S>                                                                        <C>           <C>
        Revenues:
          Crude oil, condensate, natural gas liquids and natural gas sales .....   $    1,087    $    9,445
                                                                                   ----------    ----------
        Costs and expenses:
          Production costs .....................................................   $      315    $    3,267
          Depreciation, depletion and amortization .............................          195         3,072
                                                                                   ----------    ----------
          Total costs and expenses .............................................          510         6,339
                                                                                   ----------    ----------
        Income tax provision (benefit) .........................................           99         3,313
                                                                                   ----------    ----------
        Income (loss) from oil and gas producing activities ....................   $      478    ($     207)
                                                                                   ==========    ==========
</TABLE>

        The income tax provisions were computed at the effective tax rate for
the related fiscal year.

        The Company had no oil and gas producing activities for the year ended
September 30, 2003.

                                      -41-
<PAGE>

                   CASTLE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     ("$000'S" OMITTED EXCEPT SHARE AMOUNTS)

        The Company's 17.8% interest in Delta's historical results of
operations, excluding corporate overhead and interest expense, from oil and gas
producing activities are as follows:

<TABLE>
<CAPTION>
                                                                                          YEAR ENDED JUNE 30,
                                                                                      ---------------------------
                                                                                        2004      2003      2002
                                                                                      -------   -------   -------
        <S>                                                                           <C>       <C>       <C>
        Income (loss) from oil and gas producing activities, including $982 of
         income from discontinued operations and gains from properties sold........   $ 3,339   $ 4,241   $  (673)
                                                                                      =======   =======   =======
</TABLE>

        The Company's interest in Delta's historical results of operations is
presented for annual periods ended June 30 because this is Delta's fiscal year
end.

        Assuming conversion of oil and gas production into common equivalent
units of measure on the basis of energy content, depletion rates per equivalent
MCF (thousand cubic feet) of natural gas were as follows:

<TABLE>
<CAPTION>
                                                                                        YEAR ENDED SEPTEMBER 30,
                                                                                        ------------------------
                                                                                           2004          2002
                                                                                        ----------    ----------
        <S>                                                                             <C>           <C>
        Depletion rate per equivalent MCF of natural gas............................    $     1.25    $     0.72
                                                                                        ==========    ==========
</TABLE>

        No depletion was incurred for the fiscal year ended September 30, 2003
because the Company did not directly own any oil and gas properties in fiscal
2003.

        Under the full cost method of accounting, the net book value of oil and
gas properties less related deferred income taxes (the "costs to be recovered"),
may not exceed a calculated "full cost ceiling." The ceiling limitation is the
discounted estimated after-tax future net revenues from oil and gas properties.
The ceiling is imposed separately by country. In calculating future net
revenues, current prices and costs are generally held constant indefinitely. The
costs to be recovered are compared to the ceiling on a quarterly basis. If the
costs to be recovered exceed the ceiling, the excess is written off as an
expense, except as discussed in the following paragraph.

        If, subsequent to the end of the reporting period, but prior to the
applicable financial statements being published, prices increase to levels such
that the ceiling would exceed the costs to be recovered, a write down otherwise
indicated at the end of the reporting period is not required to be reported. A
write down indicated at the end of a reporting period is also not required if
the value of additional reserves proved up on properties after the end of the
reporting period, but prior to the publishing of the financial statements, would
result in the ceiling exceeding the costs to be recovered, as long as the
properties were owned at the end of the reporting period.

        An expense recorded in one period may not be reversed in a subsequent
period even though higher oil and gas prices may have increased the ceiling
applicable to the subsequent period.

        At September 30, 2004, based upon natural gas prices at September 30,
2004, the ceiling value of the Company's reserves exceeded the Company's costs
to be recovered and no full cost ceiling write down was required.

NOTE 13 - PROVED OIL AND GAS RESERVES AND RESERVE VALUATION (UNAUDITED)

        Reserve estimates are based upon subjective engineering judgements made
by the Company's independent petroleum reservoir engineers, Ralph E. Davis
Associates, Inc. and may be affected by the limitations inherent in such
estimations. The process of estimating reserves is subject to continuous
revisions as additional information is made available through drilling, testing,
reservoir studies and production history. There can be no assurance such
estimates will not be materially revised in subsequent periods.

                                      -42-
<PAGE>

                   CASTLE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     ("$000'S" OMITTED EXCEPT SHARE AMOUNTS)

        Estimated quantities of proved reserves and changes therein, all of
which are domestic reserves, are summarized below:

<TABLE>
<CAPTION>
                                                                               ("000'S" OMITTED)
                                                                         ------------------------------
                                                                         OIL (BBLS)   NATURAL GAS (MCF)
                                                                         ---------    -----------------
        <S>                                                                 <C>            <C>
        Proved developed and undeveloped reserves:
          As of October 1, 2001 ......................................       3,009          30,692
            Production ...............................................        (179)         (2,160)
            Divestitures .............................................      (2,830)        (28,532)
                                                                         ---------        --------
          As of September 30, 2002 and 2003
            Acquisitions .............................................                       9,041
            Production ...............................................                        (156)
                                                                         ---------        --------
        As of September 30, 2004 .....................................                       8,885
                                                                         =========        ========
        Proved developed reserves:
          September 30, 2002 and 2003
                                                                         =========        ========
          September 30, 2004 .........................................                       8,081
                                                                         =========        ========
        Company's 17.8% interest in reserves of Delta (proved
         developed and undeveloped reserves):
          June 30, 2004 ..............................................       2,350          15,749
                                                                         =========        ========
</TABLE>

        The Company did not directly own any oil and gas properties at September
30, 2003.

        Delta's fiscal year is June 30th and reserve information with respect to
the Company's share of Delta's reserves is therefore presented as of that date.

        The following is a standardized measure of discounted future net cash
flows and changes therein relating to estimated proved oil and gas reserves, as
prescribed in SFAS No. 69. The standardized measure of discounted future net
cash flows does not purport to present the fair market value of the Company's
oil and gas properties. An estimate of fair value would also take into account,
among other factors, the likelihood of future recoveries of oil and gas in
excess of proved reserves, anticipated future changes in prices of oil and gas
and related development and production costs, a discount factor based on market
interest rates in effect at the date of valuation and the risks inherent in
reserve estimates:

<TABLE>
<CAPTION>
                                                                                         SEPTEMBER 30,
                                                                                              2004
                                                                                         -------------
        <S>                                                                                <C>
        Future cash inflows........................................................        $  53,961
        Future production costs....................................................          (12,116)
        Future development costs...................................................           (1,479)
        Future income tax expense..................................................          (10,563)
                                                                                           ---------
        Future net cash flows......................................................           29,803
        Discount factor of 10% for estimated timing of future cash flows...........          (16,660)
                                                                                           ---------
        Standardized measure of discounted future cash flows.......................        $  13,143
                                                                                           =========
</TABLE>

        The future cash flows were computed using the applicable year-end prices
and costs that related to then existing proved oil and gas reserves in which the
Company has interests. The estimates of future income tax expense were computed
at the blended rate (Federal and state combined) of 36%.

        No standardized measure of discounted future cash flows existed at
September 30, 2003 or 2002 because the Company owned no oil and gas properties
directly on these dates.

                                      -43-
<PAGE>

                   CASTLE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     ("$000'S" OMITTED EXCEPT SHARE AMOUNTS)

        The following were the sources of changes in the standardized measure of
discounted future net cash flows:

                                                               SEPTEMBER 30,
                                                           --------------------
                                                             2004        2002
                                                           --------    --------
        Standardized measure, beginning of year .........              $ 36,020
        Sale of oil and gas, net of production costs ....  $   (772)     (6,178)
        Net changes in prices
        Sale of reserves in place .......................               (32,678)
        Purchase of reserves in place ...................    17,802
        Development costs incurred during the period
         that reduced future development costs ..........                   434
        Net changes in income taxes .....................    (3,887)
        Accretion of discount ...........................                 2,402
                                                           --------    --------
        Standardized measure, end of year ...............  $ 13,143    $
                                                           ========    ========

        No presentation of changes in the standardized measure of discounted
future net cash flows was prepared for the year ended September 30, 2003 because
the Company had disposed of all of its oil and gas properties by May of 2002 and
did not reacquire oil and gas properties until March of 2004.

<TABLE>
<CAPTION>
                                                                                  JUNE 30,
                                                                       ------------------------------
                                                                         2004       2003       2002
                                                                       --------   --------   --------
     <S>                                                               <C>        <C>        <C>
     The Company's 17.8% interest in Delta's standardized measure of
        discounted future cash flows was as follows ................   $ 51,271   $ 43,957   $ 27,647
                                                                       ========   ========   ========
</TABLE>

        The Company's share of Delta's standardized measure of discounted future
cash flow was computed as of June 30 because this is Delta's fiscal year end.

NOTE 14 - CONTINGENT ENVIRONMENTAL LIABILITY

        ChevronTexaco Litigation

        On August 13, 2002, three subsidiaries of ChevronTexaco filed Cause No.
02-4162-JPG in the United States District Court for the Southern District of
Illinois against the Company, as well as against two inactive subsidiaries of
the Company and three unrelated parties. The lawsuit seeks damages and
declaratory relief under contractual and statutory claims arising from
environmental damage at the now dismantled Indian Refinery. In particular, the
lawsuit claims that the Company is contractually obligated to indemnify and
defend ChevronTexaco against all liability and costs, including lawsuits, claims
and administrative actions initiated by the United States Environmental
Protection Agency ("EPA") and others, that ChevronTexaco has incurred or will
incur as a result of environmental contamination at and around the Indian
Refinery, even if that environmental contamination was caused by Texaco, Inc.
and its present and former subsidiaries ("Texaco" - now merged into
ChevronTexaco) which previously owned the refinery for over 75 years. The suit
also seeks costs, damages and declaratory relief against the Company under the
Federal Comprehensive Environmental Response Compensation Liability Act
("CERCLA"), the Oil Pollution Act of 1990 ("OPA") and the Solid Waste Disposal
Act, as amended, ("RCRA").

        History

        In December 1995, Indian Refining Limited Partnership, an inactive
refining subsidiary of the Company ("IRLP") sold its refinery, the Indian
Refinery, to American Western Refining L.P. ("American Western"), an
unaffiliated party. As part of the related purchase and sale agreement, American
Western assumed all environmental liabilities and indemnified IRLP with respect
thereto. Subsequently, American Western filed for bankruptcy and sold large
portions of the Indian Refinery to an outside party pursuant to a bankruptcy
proceeding. The outside party has substantially dismantled the Indian Refinery.
American Western filed a liquidation plan in 2001. American Western anticipated
that the liquidation plan would be confirmed in January 2002 but confirmation
was delayed primarily because of legal challenges by Texaco, and subsequently

                                      -44-
<PAGE>

                   CASTLE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     ("$000'S" OMITTED EXCEPT SHARE AMOUNTS)

ChevronTexaco. American Western's liquidation plan was confirmed in April 2003.
In the plan, IRLP reduced a $5,400 secured claim against American Western to
$800. In exchange the EPA and Illinois EPA entered into an Agreement and
Covenant Not to Sue with IRLP, which extinguished all CERCLA claims against
IRLP. Under the American Western liquidation plan, IRLP received $599 which it
is currently distributing to its creditors.

        During fiscal 1998, the Company was informed that the EPA had
investigated offsite acid sludge waste found near the Indian Refinery and had
investigated and remediated surface contamination on the Indian Refinery
property. Neither the Company nor IRLP was initially named with respect to these
two actions.

        In October 1998, the EPA named the Company and two of its inactive
refining subsidiaries as potentially responsible parties for the expected
clean-up of an area of approximately 1,000 acres, which the EPA later designated
as the Indian Refinery-Texaco Lawrenceville Superfund Site. In addition,
eighteen other parties were named including Texaco and a subsidiary of Texaco
which had owned the refinery until December of 1988. The Company subsequently
responded to the EPA indicating that it was neither the owner nor the operator
of the Indian Refinery and thus not responsible for its remediation.

        In November 1999, the Company received a request for information from
the EPA concerning the Company's involvement in the ownership and operation of
the Indian Refinery. The Company responded to the EPA information request in
January 2000.

        Claims by Texaco

        On August 7, 2000, the Company received notice of a claim against it and
two of its inactive refining subsidiaries from Texaco. Texaco had made no
previous claims against the Company although the Company's subsidiaries had
owned the refinery from August 1989 until December 1995. In its claim, Texaco
demanded that the Company and its former subsidiaries indemnify Texaco for all
liability resulting from environmental contamination at and around the Indian
Refinery. In addition, Texaco demanded that the Company assume Texaco's defense
in all matters relating to environmental contamination at and around the Indian
Refinery, including lawsuits, claims and administrative actions initiated by the
EPA, and indemnify Texaco for costs that Texaco had already incurred addressing
environmental contamination at the Indian Refinery. Finally, Texaco also claimed
that the Company and two of its inactive subsidiaries were liable to Texaco
under the CERCLA as owners and operators of the Indian Refinery. The Company
responded to Texaco disputing the factual and legal contentions for Texaco's
claims against the Company. The Company's management and special counsel
subsequently met with representatives of Texaco but the parties disagreed
concerning Texaco's claims. In October 2001, Texaco merged with Chevron and the
merged company was named ChevronTexaco.

        In May 2002, the Company received a letter from ChevronTexaco which
asserted a new claim against the Company and its subsidiaries pursuant to OPA
for costs and damages incurred or to be incurred by ChevronTexaco resulting from
actual or threatened discharges of oil to navigable waters at or near the Indian
Refinery. ChevronTexaco estimated these costs and damages to be $20,500.

        The Company subsequently corresponded with ChevronTexaco and voluntarily
provided a number of documents requested by ChevronTexaco. In June 2002,
ChevronTexaco indicated to the Company that ChevronTexaco did not intend to sue
the Company. Subsequently, ChevronTexaco requested additional documents from the
Company, which the Company promptly and voluntarily again supplied to
ChevronTexaco.

        In August 2002, the Company's management and special counsel met with
legal and management representatives of ChevronTexaco in an effort to resolve
outstanding issues. At the meeting a special outside counsel of ChevronTexaco
asserted claims against the Company based upon newly expressed legal theories.
ChevronTexaco also informed the Company that residential landowners adjacent to
the Indian Refinery site had recently filed a toxic torts suit against
ChevronTexaco in Illinois state court. The meeting ended in an impasse.

                                      -45-
<PAGE>

                   CASTLE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     ("$000'S" OMITTED EXCEPT SHARE AMOUNTS)

        Litigation

        On August 13, 2002, ChevronTexaco filed the above litigation in federal
court. By letter dated August 28, 2002, ChevronTexaco tendered the Illinois
state court litigation to the Company for indemnification, but the Company
promptly responded, denying responsibility. Following the initiation of
litigation the Company retained Bryan Cave LLP as trial counsel.

        On October 25, 2002, the Company filed motions to dismiss as a matter of
law the contractual claims in Texaco's complaint, as well as the OPA and RCRA
claims. At the same time, the Company filed its answer to ChevronTexaco's
lawsuit on the remaining CERCLA claim. A pre-trial scheduling conference was
held May 5, 2003 and on May 8, 2003 two unrelated defendants were dismissed from
the case with prejudice under a stipulation with ChevronTexaco on undisclosed
terms. On June 2, 2003, the Federal District Court denied the Company's motions
to dismiss, following which, on July 9, 2003, the Company filed answers to the
contractual, OPA and RCRA claims. The parties are currently conducting discovery
and depositions. The Company is awaiting a rescheduling of the presumptive trial
date for this case from the Federal District Court caused by the court's crowded
criminal docket. The Company expects to pursue motions for summary judgment
prior to trial.

        The central argument to both ChevronTexaco's contractual and statutory
claims is that the Company should be treated as a "successor" and "alter ego" of
certain of its present and former subsidiaries, and thereby should be held
directly liable for ChevronTexaco's claims against those entities. ChevronTexaco
makes this argument notwithstanding the fact that the Company never directly
owned the refinery and never was a party to any of the disputed contracts.
ChevronTexaco has also claimed that the Company itself directly operated the
refinery. The leading opinion in this area of the law, as issued by the U.S.
Supreme Court in June 1998 in the comparable matter of United States v.
Bestfoods, 524 U.S. 51, 118 S.Ct. 1876 (1998), supports the Company's positions.

        Estimated gross undiscounted clean-up costs for this refinery are at
least $80,000-$150,000 according to public statements by Texaco to the Company
and third parties. In January 2003, the United States and the State of Illinois
filed a motion in the American Western bankruptcy case which stated that the
estimated total response costs for one portion of the site alone could range
from $109,000 to $205,000. ChevronTexaco has asserted in its contractual claim
that the Company should indemnify ChevronTexaco for all environmental
liabilities related to the Indian Refinery. If ChevronTexaco were to prevail on
this theory, the Company could be held liable for the entirety of the estimated
clean up costs, a sum far in excess of the Company's financial capability. On
the other hand, if the Company were found liable by reason of ChevronTexaco's
statutory claims for contribution and reimbursement under CERCLA and/or OPA, the
Company could be required to pay a percentage of the clean-up costs based on
equitable allocation factors such as comparative time of ownership and
operation, toxicity and amount of hazardous materials released, remediation
funded to date, as well as other factors. Since the Company's subsidiary only
operated the Indian Refinery five years, whereas Texaco operated it over
seventy-five years, the Company would expect that its share of remediation
liability would at a minimum be reduced to an amount proportional to the years
of operation by its subsidiary, although such may not be the case. Additionally,
since Texaco and its subsidiaries intentionally disposed of hazardous wastes on
site at the Indian Refinery while the Company's subsidiary arranged to remove
for offsite destruction and disposal any hazardous wastes it may have generated,
any allocation to the Company and/or its subsidiaries might be further reduced.

        The Company and its special counsel, Reed Smith LLP, do not consider an
unfavorable outcome for the Company in ChevronTexaco's lawsuit to be probable
and the Company intends to vigorously defend itself against all of
ChevronTexaco's claims in the litigation and any lawsuits that may follow. In
addition to the numerous defenses that the Company has against ChevronTexaco's
contractual claim for indemnity, the Company and its special counsel believe
that by the express language of the agreement which ChevronTexaco construes to
create an indemnity, ChevronTexaco has irrevocably elected to forego all rights
of contractual indemnification it might otherwise have had against the Company.

                                      -46-
<PAGE>

                   CASTLE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     ("$000'S" OMITTED EXCEPT SHARE AMOUNTS)

        Contingent Environmental Liabilities

        Although the Company does not believe it is liable for any of its
subsidiaries' clean-up costs and intends to vigorously defend itself in such
regard, the Company cannot predict the ultimate outcome or timing of these
matters due to inherent uncertainties. If funds for environmental clean-up are
not provided by former and/or present owners, it is possible that the Company
and/or one of its former refining subsidiaries could be held responsible or
could be named parties in additional legal actions to recover remediation costs.
In recent years, government and other plaintiffs have often sought redress for
environmental liabilities from the party most capable of payment without regard
to responsibility or fault.

        Although any environmental liabilities related to the Indian Refinery
have been transferred to others, there can be no assurance that the parties
assuming such liabilities will be able to pay them. American Western, owner of
the Indian Refinery, filed for bankruptcy and is in the process of liquidation.

        As noted above, the EPA named the Company as a potentially responsible
party for remediation of the Indian Refinery and requested and received relevant
information from the Company and ChevronTexaco has tendered the defense of a
state court toxic torts action to the Company. Whether or not the Company is
ultimately held liable in the current litigation or other proceedings, it is
probable that the Company will incur substantial legal fees and experience a
diversion of corporate resources from other opportunities.

NOTE 15 - COMMITMENTS, CONTINGENCIES AND LINE OF CREDIT

        OPERATING LEASE COMMITMENTS

        The Company has the following noncancellable operating lease commitments
and noncancellable sublease rentals at September 30, 2004:

                                                          LEASE
            YEAR ENDING SEPTEMBER 30,                  COMMITMENTS
            ----------------------------------------   -----------
                   2005 ............................   $       197
                   2006 ............................            67
                   2007 ............................            53
                   2008 ............................            49
                   2009 ............................            12
                                                       -----------
                   Total ...........................   $       378
                                                       ===========

        Rent expense for the years ended September 30, 2004, 2003 and 2002 was
$339, $449 and $517, respectively.

        SEVERANCE/RETENTION OBLIGATIONS

        At September 30, 2001, the Company had severance agreements with
substantially all of its employees, including five of its officers, that
provided for severance compensation in the event substantially all of the
Company's or its subsidiaries' assets were sold and the employees were
terminated as a result of such sale. On May 31, 2002, the Company sold all of
its oil and gas assets to Delta (see Note 4). As a result all officers and
employees of the Company except one were either severed or had their
compensation significantly reduced and had their severance approved by the
Company's Compensation Committee. Total severance obligations incurred by the
Company with respect to severance of these officers and employees was $898. All
such severance obligations were recorded by the Company in the third or fourth
quarters of fiscal 2002. At September 30, 2004, the Company still had a
severance agreement with the one officer who has not been severed and three
other employees. Such severance obligation, if the employees are severed,
aggregated $149 at September 30, 2004.

                                      -47-
<PAGE>

                   CASTLE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     ("$000'S" OMITTED EXCEPT SHARE AMOUNTS)

        LEGAL PROCEEDINGS

           CONTINGENT ENVIRONMENTAL LIABILITIES

           See Note 14.

           OTHER LITIGATION

           Long Trusts Lawsuit

           In November 2000, the Company and three of its subsidiaries were
defendants in a jury trial in Rusk County, Texas. The plaintiffs in the case,
the Long Trusts, are non-operating working interest owners in certain wells
previously operated by Castle Texas Production Limited Partnership ("CTPLP"), an
inactive exploration and production subsidiary of the Company. The wells were
among those sold to UPRC in May 1997. The Long Trusts claimed that CTPLP did not
allow them to sell gas from March 1, 1996 to January 31, 1997 as required by
applicable joint operating agreements, and they sued CTPLP and the Company's
other subsidiaries, claiming (among other things) breach of contract, breach of
fiduciary duty, conversion and conspiracy. The Long Trusts sought actual
damages, exemplary damages, prejudgment and post-judgment interest, attorney's
fees and court costs. CTPLP counterclaimed for approximately $150 of unpaid
joint interest billings plus interest, attorney's fees and court costs.

           After a three-week trial, the District Court in Rusk County submitted
36 questions to the jury which covered the claims and counterclaim in the
lawsuit. Based upon the jury's answers, the District Court entered judgment on
some of the Long Trusts' claims against the Company and its subsidiaries, as
well as CTPLP's counterclaim against the Long Trusts. The District Court issued
an amended judgment on September 5, 2001 which became final December 19, 2001.
The net amount awarded to the plaintiffs was approximately $2,700.

           The Company and its subsidiaries and the Long Trusts subsequently
filed notices of appeal, submitted legal briefs in April 2002, reply briefs in
June and July 2002, and ultimately argued the case before the 12th Court of
Appeals in Tyler, Texas in October 2002. On July 31, 2003, that court reversed
and remanded in part the trial court's judgment against the Company and its
subsidiaries while affirming the judgment against the Long Trusts which had
awarded damages on the counterclaim asserted by CTPLP. In its decision, the
appellate court held that the trial court had submitted erroneous theories to
the jury, expressly rejecting the Long Trusts' claims for breach of fiduciary
duty, conversion, implied covenants and exemplary damages. It also remanded the
Long Trusts' claims for breach of contract to the district court for retrial.
The appellate court upheld the trial court's award to CTPLP on its counterclaim
for approximately $150 of unpaid joint interests billings, $450 in attorneys'
fees, plus interest and court costs. Both the Company and its subsidiaries and
the Long Trusts thereafter submitted motions for a rehearing on certain rulings
to the 12th Court of Appeals. That court denied both motions for a rehearing.

           The Long Trusts subsequently filed a petition for review with the
Supreme Court of Texas. On March 26, 2004, the Texas Supreme Court denied the
Long Trusts petition for review and the Long Trusts filed a petition for
rehearing with that court two weeks later. That petition was also subsequently
denied, whereupon the Court of Appeals issued its mandate on June 9, 2004
completing the appellate process. Certain breach of contract claims by the Long
Trusts which were reversed and remanded by the appellate court may be retried by
the plaintiffs. The trial court has set March 15, 2005 as the trial date for
retrial of the breach of contract claims asserted by the Long Trusts. Based on
the evidence at the initial trial coupled with the guidance to the trial court
given in the appellate decision, the Company believes that it will be able to
prove that there was no breach of contract and that Long Trusts suffered no
damages, and that any such breach of contract claims, even if decided adversely
to the Company, will not result in a material loss to the Company.

           Pursuant to the mandate of the Texas Court of Appeals, the Company
has now moved to sever CTPLP's claims against the Long Trusts from any retrial
of the Long Trust's contract claims against the Company and to collect on
CTPLP's judgment against the Long Trusts which is secured by a letter of credit
posted by the Long Trusts with the trial court. The Company estimates the
judgment to be approximately $1,000, including accrued interest, as of September
30, 2004. On September 17, 2004, the Long Trusts filed a motion for
clarification with the Court of Appeals which in essence sought to

                                      -48-
<PAGE>

                   CASTLE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     ("$000'S" OMITTED EXCEPT SHARE AMOUNTS)

reverse that court's severance of CTPLP's claims from the retrial of the Long
Trusts' breach of contract claims. The Company has opposed the Long Trusts'
motion on a number of grounds and believes that it has no merit.

           To pursue its appeal the Company and its subsidiaries were required
to post a bond to cover the gross amount of damages awarded to the Long Trusts,
including interest and attorneys' fees and to maintain that bond. The Company
secured that bond with a letter of credit. Upon issue of the mandate by the
Texas Court of Appeals, the Company's $3,886 supersedeas bond was released under
Texas law. The Company's $4,110 letter of credit, including accrued interest,
securing that bond was also released and those funds are no longer restricted
cash. The Company has not accrued any recoveries for this litigation as of
September 30, 2004, but will record recoveries if and when they are ultimately
realized (collected).

           Pilgreen Litigation

           As part of the oil and gas properties acquired from AmBrit Energy
Corporation ("AmBrit") in June 1999, Castle Exploration Company, Inc., a
wholly-owned subsidiary of the Company ("CECI") acquired a 10.65% overriding
royalty interest ("ORRI") in the Simpson lease in south Texas, including the
Pilgreen #2ST gas well. CECI subsequently transferred that interest to Castle
Texas Oil and Gas Limited Partnership ("CTOGLP"), an indirect wholly-owned
subsidiary. Because the operator suspended revenue attributable to the ORRI from
first production due to title disputes, AmBrit, the previous owner, filed claims
against the operator of the Pilgreen well, and CTOGLP acquired rights in that
litigation with respect to the period after January 1, 1999. In August 2002,
$282 was released to the Company of which $249 was recorded as income by the
Company and the remaining $33 paid to Delta. Because of a claim by Dominion
Oklahoma Texas Exploration and Production, Inc. ("Dominion") (see below), a
working interest owner in the same well, that CTOGLP's ORRI in the Simpson lease
should be deemed burdened by 3.55% overriding royalty interest, there is still a
title dispute as to approximately $120 of suspended CTOGLP Pilgreen #2ST
production proceeds for the Company's account. (The Company sold all of its oil
and gas assets, including the Pilgreen #2ST well, to Delta on May 31, 2002 but
effective as of October 1, 2001.) The Company has named Dominion as a defendant
in a legal action seeking a declaratory judgment that the Company is entitled to
its full 10.65% overriding royalty interest in the Pilgreen well. The Company
believes that Dominion's title exception to CTOGLP's overriding royalty interest
is erroneous and notes that several previous title opinions have confirmed the
validity of CTOGLP's interest. The litigation is related to the Dominion
litigation (see below). Accordingly, the Company believes that CTOGLP will
prevail in this litigation if CTOGLP prevails in the Dominion Litigation or that
CTOGLP will fail in this litigation if it fails in the Dominion Litigation.
Since the Company has not recorded any revenue related to the $120 of suspended
revenue, it expects to record $120 of revenue if it prevails, but no expense if
it fails in this litigation. Dominion has filed a motion for summary judgment
but the trial court ordered a continuance of that motion until a final opinion
is issued by the Appellate Courts in the Dominion matter, described below, since
the controversies are fundamentally similar.

           CTOGLP, along with several unrelated parties, has also filed suit to
collect production proceeds from an additional well on the Simpson lease in
which CTOLGP had a 5.325% overriding royalty interest suspended by the operator
because of title disputes. The Company intends to contest this matter
vigorously. At the present time, the amount held in escrow applicable to the
additional well attributable to the Company's interest is approximately $66
although approximately $22 of that amount would be subject to Dominion's claims
in the Pilgreen Litigation. The Company has not recorded any of the $66 of
suspended revenue as income but will record it as income when and if it is
realized (collected).

           Dominion Litigation

           On March 18, 2002, Dominion, operator of the Mitchell and
Migl-Mitchell wells in the Southwest Speaks field in south Texas and a working
interest owner in the Pilgreen #2ST well, filed suit in Texas against CTOGLP
seeking declaratory judgment in a title action that the overriding royalty
interest held by CTOGLP in these wells should be deemed to be burdened by
certain other overriding royalty interests aggregating 3.55% and should
therefore be reduced from 10.65% to 7.10%. Dominion is also seeking an
accounting and refund of payments for overriding royalty to CTOGLP in excess of
the 7.10% since April 2000. The Company currently estimates the amount in
controversy to be approximately $781. Dominion threatened to suspend all revenue
payable to the Company from the Mitchell and Migl-Mitchell to offset its claim.
The Company and Dominion subsequently examined the land and lease documents
concerning the overriding royalty interests. The Company believes that
Dominion's title exception to CTOGLP's overriding royalty interest is erroneous
and notes that several previous title opinions have confirmed the validity of
CTOGLP's interest.

                                      -49-
<PAGE>

                   CASTLE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     ("$000'S" OMITTED EXCEPT SHARE AMOUNTS)

           In July 2003, Dominion filed a motion for partial summary judgment
concerning the Company's claim that it had assumed the liabilities of its
predecessor in interest and CTOGLP filed its response to Dominion's motion as
well as its own cross motion for partial summary judgment. In September 2003,
the District Court of Lavaca County granted Dominion's partial motion for
partial summary judgment. In January 2004, Dominion filed a motion for final
summary judgment on this matter to which CTOGLP and the other defendants filed a
response. In May 2004, the District Court of Lavaca County granted Dominion's
motion for final summary judgment. The Company has filed an appeal of both the
District Court's summary judgments with the Court of Appeals in Corpus Christi
and both sides have filed briefs.

           At June 30, 2004, the Company accrued a provision of $825 related to
this litigation, including $44 in estimated interest and plaintiff's legal
costs.

        GAMXX

        On February 27, 1998, the Company entered into an agreement with
Alexander Allen, Inc. ("AA") concerning amounts owed to the Company by AA and
its subsidiary, GAMXX Energy, Inc. ("GAMXX"). The Company had made loans to
GAMXX through 1991 in the aggregate amount of approximately $8,000. When GAMXX
was unable to obtain financing, the Company recorded a one hundred percent loss
provision on its loans to GAMXX in 1991 and 1992 while still retaining its
lender's lien against GAMXX.

        Pursuant to the terms of the GAMXX Agreement, the Company was to receive
$1,000 cash in settlement for its loans when GAMXX closed on its financing.
GAMXX expected such closing not later than May 31, 1998 but failed to close. As
a result, the Company elected to terminate the GAMXX Agreement. Pursuant to the
agreement, GAMXX agreed to assist the Company in selling GAMXX's assets or the
Company's investment in GAMXX. The Company is currently seeking to dispose of
its lender's interest in GAMXX and recover some of the loan to GAMXX.

        The Company has carried its loans to GAMXX at zero for the last ten
years. The Company will record any proceeds as "other income" if and when it
collects such amount.

NOTE 16 - EMPLOYEE BENEFIT PLAN

        401(K)  PLAN

        On October 1, 1995, the Company adopted a 401(k) plan (the "Plan") for
its employees and those of its subsidiaries. All employees are eligible to
participate. Employees participating in the Plan can authorize the Company to
contribute up to 15% of their gross compensation to the Plan. The Company
matches such voluntary employee contributions up to 3% of employee gross
compensation. Employees' contributions to the Plan cannot exceed thresholds set
by the Secretary of the Treasury. Vesting of Company contributions is immediate.
During the years ended September 30, 2004, 2003 and 2002, the Company's
contributions to the Plan aggregated $13, $18, and $46, respectively.

        POST-RETIREMENT BENEFITS

        Neither the Company nor its subsidiaries provide any other
post-retirement plans for employees.

NOTE 17 - STOCKHOLDERS' EQUITY

        From November 1996 until September 30, 2003, the Company's Board of
Directors authorized the Company to purchase up to 5,267,966 of its outstanding
shares of common stock on the open market. As of September 30, 2004, 4,911,020
shares had been repurchased at a cost of $66,667. The repurchased shares are
held in treasury.

        On June 30, 1997, the Company's Board of Directors approved a dividend
policy of $.20 per share per year, payable quarterly. The dividend policy
remains in effect until rescinded or changed by the Board of Directors.
Quarterly dividends of $.05 per share have subsequently been paid for all
quarters except that ending June 30, 2002.

                                      -50-
<PAGE>

                   CASTLE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     ("$000'S" OMITTED EXCEPT SHARE AMOUNTS)

        On April 21, 1994, the Board of Directors of the Company adopted a
Stockholder Rights Plan ("Plan") under which one preferred stock purchase right
would be distributed for each outstanding share of the Company's common stock.
Each right initially entitles holders of common stock to buy one-hundredth of
one share of a new series of preferred stock at an exercise price of $35.00. The
rights will be exercisable only if a person or group, without the prior approval
of the Company's Board of Directors, acquires 15% or more of the outstanding
common stock or announces a tender offer as a result of which such person or
group would own 15% or more of the common stock. If a person to whom these
provisions apply becomes a beneficial owner of 15% or more of the outstanding
common stock, each right (other than rights held by such acquiring person) will
also enable its holder to purchase common stock (or equivalent securities) of
the Company having a value of $70.00 for a purchase price of $35.00. In
addition, if the Company is involved in a merger or other business combination
with another entity, at or after the time that any person acquires 15% or more
of the outstanding common stock, each right will entitle its holder to purchase,
at $35.00 per right, common shares of such other entity having a value of $70.00

        On December 31, 2002, the Company's Board of Directors amended the Plan
such that the rights will not become exercisable if a person who is an
institutional investor acquires more than 15% but less than 25% of the Company's
outstanding common stock.

        At September 30, 2004, the Company's investment in Delta aggregated
$39,698. Since Delta's current loan covenants with its lenders do not permit the
payment of dividends, the Company currently expects no distributions from Delta.

NOTE 18 - STOCK OPTIONS AND WARRANTS

        Option and warrant activities during each of the three years ended
September 30, 2004 are as follows (in whole units):

<TABLE>
<CAPTION>
                                                                                           INCENTIVE
                                                                                              PLAN         OTHER
                                                                                             OPTIONS      OPTIONS         TOTAL
                                                                                           ----------    ----------    ----------
     <S>                                                                                   <C>           <C>            <C>
     Outstanding at October 1, 2001 ....................................................      690,000        60,000       750,000
     Issued ............................................................................       60,000                      60,000
                                                                                           ----------    ----------    ----------
     Outstanding at September 30, 2002 .................................................      750,000        60,000       810,000
     Expired ...........................................................................      (97,500)                    (97,500)
                                                                                           ----------    ----------    ----------
     Outstanding at September 30, 2003 .................................................      652,500        60,000       712,500
     Exercised .........................................................................     (277,500)                   (277,500)
                                                                                           ----------    ----------    ----------
     Outstanding at September 30, 2004 .................................................      375,000        60,000       435,000
                                                                                           ==========    ==========    ==========
     Exercisable at September 30, 2004 .................................................      375,000        60,000       435,000
                                                                                           ==========    ==========    ==========
     Reserved at September 30, 2004 ....................................................    1,687,500        60,000     1,747,500
                                                                                           ==========    ==========    ==========
     Reserved at September 30, 2003 ....................................................    1,687,500        60,000     1,747,500
                                                                                           ==========    ==========    ==========
     Reserved at September 30, 2002 ....................................................    1,687,500        60,000     1,747,500
                                                                                           ==========    ==========    ==========
     Reserved at September 30, 2001 ....................................................    1,687,500        60,000     1,747,500
                                                                                           ==========    ==========    ==========
     Exercise prices at:

             September 30, 2004 ........................................................   $     3.71-   $     3.79
                                                                                           $     8.58

             September 30, 2003 ........................................................   $     3.42-   $     3.79
                                                                                           $     8.58

             September 30, 2002 ........................................................   $     3.42-   $     3.79
                                                                                           $     8.58

             Exercise Termination Dates ................................................   05/01/2006-    4/23/2007    05/09/2006-
                                                                                           01/02/2012                  01/02/2012
</TABLE>

                                      -51-
<PAGE>

                   CASTLE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     ("$000'S" OMITTED EXCEPT SHARE AMOUNTS)

        In fiscal 1993, the Company adopted the 1992 Executive Equity Incentive
Plan (the "Incentive Plan"). The purpose of the Incentive Plan is to increase
the ownership of common stock of the Company by those non-union key employees
(including officers and directors who are officers) and outside directors who
contribute to the continued growth, development and financial success of the
Company and its subsidiaries, and to attract and retain key employees and reward
them for the Company's profitable performance.

        The Incentive Plan provided that an aggregate of 1,687,500 shares of
common stock of the Company will be available for awards in the form of stock
options, including incentive stock options and non-qualified stock options
generally at prices at or in excess of market prices at the date of grant.

        The Incentive Plan also provided that each outside director of the
Company would annually be granted an option to purchase 15,000 shares of common
stock at fair market value on the date of grant. Effective October 1, 2002, the
Company's Compensation Committee terminated the annual option grants to outside
directors. No options have been granted since January 2002.

        The Company applies APB 25 in accounting for options and warrants and
accordingly recognizes no compensation cost for its stock options and warrants
for grants with an exercise price equal to the current fair market value.

        A summary of the Company's stock option and warrant activity from
October 1, 2000 through September 30, 2003 is as follows:

                                                              WEIGHTED
                                                               AVERAGE
                                                    OPTIONS     PRICE
                                                   --------   --------
        Outstanding - October 1, 2001 ..........    750,000   $   5.24
        Issued .................................     60,000       5.93
                                                   --------   --------
        Outstanding - September 30, 2002 .......    810,000       5.29
        Expired ................................    (97,500)      4.08
                                                   --------   --------
        Outstanding - September 30, 2003 .......    712,500   $   5.46
                                                              ========
        Exercised ..............................   (277,500)  $   4.94
                                                   --------   ========
        Outstanding - September 30, 2004 .......    435,000   $   5.79
                                                   ========   ========

        At September 30, 2004, exercise prices for outstanding options ranged
from $3.71 to $8.58. The weighted average remaining contractual life of such
options was 4.26 years.

        The per share weighted average fair values of stock options issued
during fiscal 2002 was $1.03 on the dates of issuance using the Black-Scholes
option pricing model with the following weighted average assumptions: average
expected dividend yield - 2.7% in 2002; risk free interest rate - 2.64% in 2002;
expected life of 10 years in 2002 and volatility factor of .40 in 2002.

        No stock options were issued in fiscal 2003 or fiscal 2004.

                                      -52-
<PAGE>

                   CASTLE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     ("$000'S" OMITTED EXCEPT SHARE AMOUNTS)

NOTE 19 - INCOME TAXES

        Provisions for (benefit of) income taxes consist of:

<TABLE>
<CAPTION>
                                                                           YEAR ENDED SEPTEMBER 30,
                                                                       --------------------------------
                                                                         2004        2003        2002
                                                                       --------    --------    --------
        <S>                                                            <C>         <C>         <C>
        Provision for (benefit of) income taxes:
           Current:
             Federal ...............................................   $    337
             State .................................................
           Deferred:
             Federal ...............................................      5,389    $ (1,809)   $   (252)
             State .................................................        164         (52)         (7)
           Adjustment to the valuation allowance for deferred taxes:
             Federal ...............................................     (3,404)      1,470       1,307
             State .................................................       (101)         42          37
                                                                       --------    --------    --------
                                                                       $  2,385    $   (349)   $  1,085
                                                                       ========    ========    ========
</TABLE>

        Deferred tax assets (liabilities) are comprised of the following at
September 30, 2004 and 2003:

                                                              SEPTEMBER 30,
                                                          --------------------
                                                            2004        2003
                                                          --------    --------
     Litigation provision .............................   $    297
     Investment in Delta Petroleum Corporation ........     (7,119)   $    (80)
     Operating losses and tax credit carryforwards ....        757       4,384
     Statutory depletion carryovers ...................                  2,037
                                                               866         866
                                                                28         173
     Other ............................................          1          50
                                                          --------    --------
                                                            (5,170)      7,430
     Valuation allowance ..............................                 (6,416)
                                                          --------    --------
                                                          $ (5,170)   $  1,014
                                                          ========    ========

     Deferred tax assets - current ....................               $    648
     Deferred tax assets - (liability) - long-term ....   $ (5,170)        366
                                                          --------    --------
                                                          $ (5,170)   $  1,014
                                                          ========    ========

        At September 30, 2004, the Company decreased its valuation allowance by
$6,416 based upon its assessment of the amount of gross deferred tax asset that
would more likely than not be realized based on an estimate of future taxable
income. Approximately $3,500 of the decrease in the valuation allowance was
recorded as a reduction in income tax expense. The net deferred tax liability at
September 30, 2004 relates primarily a difference between the book value and tax
basis of the Company's investment in Delta.

                                      -53-
<PAGE>

                   CASTLE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     ("$000'S" OMITTED EXCEPT SHARE AMOUNTS)

        The income tax provision (benefit) differs from the amount computed by
applying the statutory federal income tax rate to income before income taxes as
follows:

<TABLE>
<CAPTION>
                                                                                YEAR ENDED SEPTEMBER 30,
                                                                            --------------------------------
                                                                              2004        2003        2002
                                                                            --------    --------    --------
        <S>                                                                 <C>         <C>         <C>
        Tax expense (benefit) at statutory rate .........................   $  5,602    $   (823)   $   (265)
        State taxes, net of federal benefit .............................        160         (15)         (8)
        Revision of tax estimates related to oil and gas tax credits ....                   (427)
        Revision of tax estimates related to statutory depletion ........                   (130)
        Revision of tax estimates .......................................        128        (466)
        Increase (decrease) in valuation allowance ......................     (6,416)      1,512       1,345
        Other ...........................................................                                 13
        Change in valuation allowance credited to Paid-in Capital .......      2,911
                                                                            --------    --------    --------
                                                                            $  2,385    $   (349)   $  1,085
                                                                            ========    ========    ========
   </TABLE>

        At September 30, 2004, the Company had the following tax carryforwards
available:

                                                     FEDERAL TAX
                                              -------------------------
                                                            ALTERNATIVE
                                                              MINIMUM
                                                REGULAR         TAX
                                              -----------   -----------
        Net operating loss ................                 $     4,668
        Alternative minimum tax credits ...   $       757           N/A

        The net operating loss carryforwards expire from 2005 through 2010.

        The Company also estimates that it has approximately $55,000 in
individual state tax loss carryforwards available at September 30, 2004. Most of
such carryforwards are primarily available to offset taxable income apportioned
to certain states in which the Company has no operations. As a result, it is
probable at the present time that most of such state tax carryforwards will
expire unused.

NOTE 20 - RELATED PARTIES

        An officer of the Company was a 10% shareholder in an unaffiliated
company that was entitled to receive 12.5% of the Company's share of net cash
flow from its Romanian joint venture after the Company had recovered its
investment in Romania. In August 2002, the Company purchased the 12.5% net cash
interest from the unaffiliated company for $8 and in September 2002, the Company
sold all of its oil and gas interests in Romania without realizing any revenue.
(See Note 4.)

        During the years ended September 30, 2004, 2003 and 2002, Delta paid two
officers of the Company $315, $420 and $105, respectively, for consulting
compensation for the period June 1, 2002 to May 31, 2004. As a result of the
Company's sale of all of its domestic oil and gas properties to Delta on May 31,
2002 (see Note 4), the Company had reduced the salaries of the two officers by
approximately 65%.

        The Company paid Delta $172 for services provided in conjunction with
operation of the Company's gas properties from March 30, 2004 to September 30,
2004. (See Note 4.)

                                      -54-
<PAGE>

                   CASTLE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     ("$000'S" OMITTED EXCEPT SHARE AMOUNTS)

        In March 2004, the Company purchased gas properties from Delta and five
limited partnerships, whose general partner was a company owned by an officer of
the Company. See Note 4.

NOTE 21 - BUSINESS SEGMENTS

        As of September 30, 1995, the Company had disposed of its refining
business (see Note 3) and operated in only two business segments - natural gas
marketing and transmission and exploration and production. In May 1997, the
Company sold its pipeline (natural gas transmission) to a subsidiary of UPRC. As
a result, the Company was no longer in the natural gas transmission segment but
continued to operate in the natural gas marketing and exploration and production
segments. On May 31, 1999, the Company's long-term gas sales and gas supply
contracts expired by their own terms and the Company exited the natural gas
marketing business. During 2002, the equity method losses incurred as a result
of the Company's investment in Network exceeded a threshold for identifying and
reporting Network as an additional segment. Network is engaged in the planning,
installation and operation of natural gas fueled energy generating facilities.
This segment is referred to as the Power Business.

        The Company does not allocate interest income, interest expense or
income tax expense to these segments.

<TABLE>
<CAPTION>
                                                                  YEAR ENDED SEPTEMBER 30, 2004
                                --------------------------------------------------------------------------------------------------
                                  NATURAL GAS       OIL & GAS                                       ELIMINATIONS
                                   MARKETING       EXPLORATION                                          AND
                                     AND              AND           REFINING          POWER          CORPORATE
                                 TRANSMISSION      PRODUCTION    (DISCONTINUED)      BUSINESS           ITEMS        CONSOLIDATED
                                --------------   --------------  --------------   --------------   --------------   --------------
<S>                             <C>              <C>             <C>              <C>              <C>              <C>
Revenues .....................                   $        1,087                                                     $        1,087
Equity in net income (loss) of
 equity method investees .....                   $        1,352                                                     $        1,352
Operating income (loss) ......                               59                                    $       (4,795)  $       (4,736)
Identifiable assets ..........  $       66,973   $       74,857                                    $      (58,004)  $       83,826
Investment in equity method
 investees ...................                   $       39,698                                                     $       39,698
Capital expenditures .........                   $        9,421                                    $           22   $        9,443
Depreciation, depletion and
 amortization ................                   $          195                                    $           56   $          251
</TABLE>

<TABLE>
<CAPTION>
                                                                  YEAR ENDED SEPTEMBER 30, 2003
                                --------------------------------------------------------------------------------------------------
                                  NATURAL GAS       OIL & GAS                                       ELIMINATIONS
                                   MARKETING       EXPLORATION                                          AND
                                     AND              AND           REFINING          POWER          CORPORATE
                                 TRANSMISSION      PRODUCTION    (DISCONTINUED)      BUSINESS           ITEMS        CONSOLIDATED
                                --------------   --------------  --------------   --------------   --------------   --------------
<S>                             <C>              <C>             <C>              <C>              <C>              <C>
Revenues......................
Equity in net income (loss) of
 equity method investees......                   $        1,067                   $          (20)                   $        1,047
Operating income (loss).......                                                                     $       (3,621)  $       (3,621)
Identifiable assets...........  $      66,971    $       78,486                                    $      (95,649)  $       49,808
Investment in equity method
 investees....................                   $       29,477                                                     $       29,477
Capital expenditures..........
Depreciation, depletion and
 amortization.................                                                                     $           56   $           56
</TABLE>

                                      -55-
<PAGE>

                   CASTLE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     ("$000'S" OMITTED EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                   YEAR ENDED SEPTEMBER 30, 2002
                                --------------------------------------------------------------------------------------------------
                                  NATURAL GAS       OIL & GAS                                       ELIMINATIONS
                                   MARKETING       EXPLORATION                                          AND
                                     AND              AND            REFINING         POWER          CORPORATE
                                 TRANSMISSION      PRODUCTION     (DISCONTINUED)     BUSINESS           ITEMS        CONSOLIDATED
                                --------------   --------------   --------------  --------------   --------------   --------------
<S>                             <C>              <C>              <C>             <C>              <C>              <C>
Revenues......................                   $        9,445                                                     $        9,445
Equity in net (loss) of equity
 method investees.............                   $         (598)                  $         (176)                   $         (774)
Operating income (loss).......                   $          676                                    $       (3,991)  $       (3,315)
Identifiable assets...........  $       66,973*  $       82,832                                    $      (97,864)  $       51,941
Investment in equity method
 investees....................                   $       26,886                                    $          375   $       27,261
Capital expenditures..........                   $          816                                    $            1   $          817
Depreciation, depletion and
 amortization.................                   $        3,149                                    $            2   $        3,151
</TABLE>

        * Consists primarily of intercompany receivables.

        No purchaser of the Company's oil and gas production accounted for ten
percent or more of the Company's oil and gas sales for the year ended September
30, 2002. The Company had no oil and gas sales for the year ended September 30,
2003. For the year ended September 30, 2004, four purchasers of the Company's
gas production accounted for 34%, 18%, 17% and 10%, respectively, of the
Company's gas sales.

NOTE 22 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

        Cash and Cash Equivalents -- the carrying amount is a reasonable
estimate of fair value.

        Marketable securities are related solely to the Company's investment in
ChevronTexaco common stock at September 30, 2004 and are recorded at fair market
value. Market value for common stock is computed to equal the closing share
price at year end times the number of shares held by the Company.

        Other Current Assets and Current Liabilities - the Company believes that
the book values of other current assets and current liabilities approximate the
market values.

NOTE 23 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

<TABLE>
<CAPTION>
                                                            FIRST            SECOND           THIRD            FOURTH
                                                           QUARTER          QUARTER          QUARTER          QUARTER
                                                        (DECEMBER 31)     (MARCH 31)        (JUNE 30)      (SEPTEMBER 30)
                                                        -------------    -------------    -------------    --------------
        <S>                                             <C>              <C>              <C>              <C>
        Year Ended September 30, 2004:
           Revenues .................................                                     $         491    $         596
           Operating income (loss) ..................   $      (1,251)   $      (1,198)   $      (1,601)   $         (686)
           Net income (loss) ........................   $      (1,248)   $      12,168    $       2,713    $          (13)
           Net income (loss) per share (diluted) ....   $        (.19)   $        1.77    $         .39    $         (.00)
</TABLE>

                                      -56-
<PAGE>

                   CASTLE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     ("$000'S" OMITTED EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                            FIRST           SECOND          THIRD           FOURTH
                                                           QUARTER         QUARTER         QUARTER         QUARTER
                                                        (DECEMBER 31)    (MARCH 31)       (JUNE 30)     (SEPTEMBER 30)
                                                        -------------   -------------   -------------   --------------
        <S>                                             <C>             <C>             <C>             <C>
        Year Ended September 30, 2003:
           Revenues
           Operating income (loss) ..................   $        (626)  $        (710)  $        (762)  $       (1,523)
           Net income (loss) ........................             245   $        (656)  $        (728)  $         (862)
           Net income (loss) per share (diluted) ....   $         .04   $        (.10)  $        (.11)  $         (.13)
</TABLE>

NOTE 24 - SUBSEQUENT EVENT

        Subsequent to September 30, 2004, an officer of the Company exercised
options for 45,000 shares of the Company's common stock. The proceeds to the
Company were $364.

                                      -57-
<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders
Castle Energy Corporation:

We have audited the accompanying consolidated balance sheets of Castle Energy
Corporation and subsidiaries as of September 30, 2004 and 2003, and the related
consolidated statements of operations, stockholders' equity and other
comprehensive income, and cash flows for each of the years in the three-year
period ended September 30, 2004. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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 financial position of Castle Energy
Corporation and subsidiaries as of September 30, 2004 and 2003, and the results
of their operations and their cash flows for each of the years in the three-year
period ended September 30, 2004 in conformity with U.S. generally accepted
accounting principles.

KPMG LLP

Houston, Texas
December 14, 2004

                                      -58-
<PAGE>

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

        None

ITEM 9A. CONTROLS AND PROCEDURES

The conclusions of the Company's Chief Executive Officer and Chief Financial
Officer concerning the effectiveness of the Company's disclosure controls and
procedures and changes in internal controls as of September 30, 2004 are as
follows:

        a)  They have concluded that the Company's disclosure controls and
            procedures are effective in ensuring that information required to be
            disclosed by the Company in the reports it files or submits under
            the Securities Exchange Act of 1934, as amended, is recorded,
            processed, summarized and reported within the time periods specified
            in the rules and forms of the SEC.

        b)  There were no significant changes in the Company's internal controls
            during the quarter ended September 30, 2004 that have materially
            affected or are reasonably likely to materially affect, the
            Company's internal control over financial reporting.

            See Exhibits 31.1 and 31.2 to this Form 10-K.

                                      -59-
<PAGE>

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT**

ITEM 11. EXECUTIVE COMPENSATION**

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT**

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - NONE

ITEM 14. PRINCIPAL ACCOUNTANT'S FEES AND SERVICES

        Fees billed to the Company by the Company's independent accountants,
        KPMG LLP, were as follows:

                                                 YEAR ENDED SEPTEMBER 30,
                                                 ------------------------
                                                    2004          2003
                                                 ----------    ----------
                Audit fees ...................   $  125,651    $   96,000
                Audit - related fees .........
                Tax fees .....................
                All other fees ...............
                                                 ----------    ----------
                                                 $  125,651    $   96,000
                                                 ==========    ==========

        The policy of the Audit Committee of the Company is to pre-approve all
professional services performed by the Company's independent accountant.

----------
**      The information required by Items 10, 11 and 12 is incorporated by
        reference to the Registrant's Proxy Statement for its 2005 Annual
        Meeting of Stockholders.

                                      -60-
<PAGE>

                                     PART IV

ITEM 15.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

    (a) Financial Statements and Financial Statement Schedules

            Financial statements and schedules filed as part of this Report on
            Form 10-K are listed in Item 8 of this Form 10-K.

    (b) Exhibits

        The Exhibits required by Item 601 of Regulation S-K and filed herewith
or incorporated by reference herein are listed in the Exhibit Index below.

<TABLE>
<CAPTION>
EXHIBIT NUMBER     DESCRIPTION OF DOCUMENT
--------------     ------------------------------------------------------------------------------------------------
    <S>            <C>
    3.1            Restated Certificate of Incorporation(15)
    3.2            Bylaws(10)
    4.1            Specimen Stock Certificate representing Common Stock(8)
    4.2            Rights  Agreement  between  Castle  Energy  Corporation  and American  Stock  Transfer and Trust
                   Company as Rights Agent, dated as of April 21, 1994(10)
    10.33          Castle Energy Corporation 1992 Executive Equity Incentive Plan(8)
    10.34          First Amendment to Castle Energy  Corporation 1992 Executive  Equity  Incentive Plan,  effective
                   May 11, 1993(8)
    10.124         Asset Purchase  Agreement  dated February 27, 1998 by and between Castle Energy  Corporation
                   and Alexander Allen, Inc. (21)
    10.132         Castle Energy Corporation Severance Benefit Plan (26)
    10.140         Agreement to Transfer a Membership  Interest In Networked  Energy LLC to CEC, Inc., dated
                   August 31, 2000 (31)
    10.142         Purchase  and  Sale  Agreement,  dated  April 1,  2001,  between  Strand  Energy  LC and
                   Castle Exploration Company, Inc. (30)
    10.143         Credit  Agreement  as of November  26, 2001 among Castle  Exploration  Company,  Inc. and
                   Castle Energy Corporation and Bank of Texas National Association (37)
    10.144         Purchase and Sale Agreement between Castle Energy  Corporation and Delta Petroleum  Corporation,
                   executed January 15, 2002 (32)
    10.145         Amendment Number One to Purchase and Sale Agreement between Castle Energy  Corporation
                   and Delta Petroleum Corporation, March 2002 (33)
    10.146         Purchase and Sale Agreement  between Redeco Petroleum Company Limited and Hemco Romania Limited,
                   dated September 6, 2002 (35)
    10.147         Amendment of Rights  Agreements  between Castle Energy  Corporation  and American Stock Transfer
                   Company as Rights Agent, dated December 31, 2002 (36)
    10.148         Purchase and Sale Agreement between Delta Petroleum Corporation and Castle Exploration Company,
                   Inc., dated March 30, 2004 (37)
    11.1           Statement re: Computation of Earnings Per Share
    21             List of subsidiaries of Registrant
    21.1           Separate financial statements of Delta Petroleum Corporation - Year Ended June 30, 2004
    23.3           Consent of Ralph Davis & Co.
    31.1           Certificate of Chief Executive Officer (Section 302 of Sarbanes-Oxley Act)
    31.2           Certificate of Chief Financial Officer (Section 302 of Sarbanes-Oxley Act)
    32.1           Certificate of Chief Executive Officer (Section 906 of Sarbanes-Oxley Act)
    32.2           Certificate of Chief Financial Officer (Section 906 of Sarbanes-Oxley Act)
</TABLE>

                                      -61-
<PAGE>

<TABLE>
    <S>            <C>
    (8)            Incorporated by reference to the Registrant's Form S-1 (Registration
                   Statement), dated September 29, 1993 (File 33-69626)
    (10)           Incorporated by reference to the Registrant's Form 10-Q for the second quarter
                   ended March 31, 1994 (File 0-10990)
    (15)           Incorporated by reference to the Registrant's Form 10-K for the fiscal year ended
                   September 30, 1994 (File 0-10990)
    (23)           Incorporated by reference to the Registrant's Form 10-Q for quarter ended
                   March 31, 1998 (File 0-10990)
    (26)           Incorporated by reference to the Registrant's Form 10-K for the fiscal year ended
                   September 30, 1999 (File 0-10990)
    (30)           Incorporated by reference to the Registrant's Form 10-Q for quarter ended
                   March 31, 2001 (File 0-10990)
    (31)           Incorporated by reference to the Registrant's Form 10-K for year ended
                   September 30, 2000 (File 0-10990)
    (32)           Incorporated by reference to the Registrant's Form 10-Q for quarter ended
                   December 31, 2001 (File 0-10990)
    (33)           Incorporated by reference to the Registrant's Form 10-Q for quarter ended
                   March 31, 2002 (File 0-10990)
    (35)           Incorporated by reference to the Registrant's Form 10-Q for quarter ended
                   September 30, 2002 (File 0-10990)
    (36)           Incorporated by reference to the Registrant's Form 10-Q for quarter ended
                   December 31, 2002 (File 0-10990)
    (37)           Incorporated by reference to the Registrant's Form 10-Q for quarter ended
                   March 31, 2004 (File 0-10990)
</TABLE>

                                      -62-
<PAGE>

                                   SIGNATURES

        Pursuant to the requirements of Section 13 or 15(d) of the Securities
        Exchange Act of 1934, the Registrant has duly caused this report to be
        signed on its behalf by the undersigned, thereunto duly authorized.

                            CASTLE ENERGY CORPORATION


Date:    December 24, 2004                    By: /s/JOSEPH L. CASTLE II
                                                  ------------------------------
                                                  Joseph L. Castle II
                                                  Chairman of the Board
                                                  and Chief Executive Officer

        Pursuant to the requirements of the Securities Exchange Act of 1934,
        this report has been signed by the following persons on behalf of the
        registrant and in the capacities and on the dates indicated.


/s/JOSEPH L. CASTLE II           Chairman of the Board and    December 24, 2004
-----------------------------    Chief Executive Officer
Joseph L. Castle II              Director

/s/MARTIN R. HOFFMANN            Director                     December 24, 2004
-----------------------------
Martin R.Hoffmann

/s/JOHN P. KELLER                Director                     December 24, 2004
-----------------------------
John P. Keller

/S/RUSSELL S. LEWIS              Director                     December 24, 2004
-----------------------------
Russell S. Lewis

/s/RICHARD E. STAEDTLER          Senior Vice President        December 24, 2004
-----------------------------    Principal Financial Officer
Richard E. Staedtler             Principal Accounting Officer
                                 Director

/s/SIDNEY F. WENTZ               Director                     December 24, 2004
-----------------------------
Sidney F. Wentz

                                      -63-
<PAGE>

                   DIRECTORS, OFFICERS, BOARD OF DIRECTORS AND
                                  PROFESSIONALS
                               (DECEMBER 24, 2004)

<TABLE>
<S>                                          <C>                      <C>
JOSEPH L. CASTLE II                                                   RICHARD E. STAEDTLER
Chairman & Chief Executive Officer                                    Chief Financial Officer and Chief
                                                                         Accounting Officer

MARTIN R. HOFFMANN                                                    SIDNEY F. WENTZ
Former Secretary of the Army                                          Former Chairman of The Robert
                                                                      Wood Johnson Foundation

JOHN P. KELLER                                                        RUSSELL S. LEWIS
President, Keller Group, Inc.                                         President, Lewis Capital Group

                                             OPERATING OFFICERS

JOSEPH L. CASTLE II                                                   RICHARD E. STAEDTLER
Chief Executive Officer Chief
Financial Officer                                                     Chief Accounting Officer

MARY A. CADE
Company Controller and Treasurer

WILLIAM C. LIEDTKE III
Vice President and General Counsel

                                              PRINCIPAL OFFICES

357 South Gulph Road
512 Township Line Road
Suite 260                                                             Three Valley Square, Suite 100
King of Prussia, PA 19406                                             Blue Bell, PA 19422

5623 North Western Avenue, Suite A
Oklahoma City, OK 73118

                                               PROFESSIONALS

COUNSEL                                                               REGISTRAR AND TRANSFER AGENT

Duane Morris LLP                                                      American Stock Transfer &
                                                                      Trust Company
One Liberty Place, 42nd Floor                                         40 Wall Street, 46th Floor
Philadelphia, PA 19103-7396                                           New York, New York 10005

INDEPENDENT ACCOUNTANTS

KPMG LLP
700 Louisiana
Houston, Texas 77002
</TABLE>