<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, 2003

                                       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, PA                                  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, 2003, there were 6,592,884 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 $29,188,522
(5,015,210 shares at $5.82 per share).

                      DOCUMENTS INCORPORATED BY REFERENCE:

         Portions of the Proxy Statement for the 2004 Annual Meeting of
Stockholders are incorporated by reference in Items 10, 11, 12 and 13


<PAGE>
                            CASTLE ENERGY CORPORATION
                                 2003 FORM 10-K
                                TABLE OF CONTENTS
<TABLE>
<CAPTION>
        Item                                                                                                    Page
        ----                                                                                                    ----
         <S>                           <C>                                                                       <C>

                                     PART I
                                     ------

      1. and 2.      Business and Properties...........................................................           1
             3.      Legal Proceedings.................................................................           5
             4.      Submission of Matters to a Vote of Security Holders...............................          10

                                     PART II
                                     -------

             5.      Market for the Registrant's Common Equity and Related Stockholder Matters.........          11
             6.      Selected Financial Data...........................................................          12
             7.      Management's Discussion and Analysis of Financial Condition and Results of
                     Operations........................................................................          13
             8.      Financial Statements and Supplementary Data.......................................          23
             9.      Changes in and Disagreements with Accountants on Accounting and Financial
                     Disclosure........................................................................          60

                                    PART III
                                    --------

            10.     Directors and Executive Officers of the Registrant.................................          61
            11.     Executive Compensation.............................................................          61
            12.     Security Ownership of Certain Beneficial Owners and Management and Related
                    Shareholder Matters................................................................          61
            13.     Certain Relationships and Related Transactions.....................................          61
            14.     Controls and Procedures............................................................          61
            15.     Principal Accountant Fees and Services.............................................          61



                                     PART IV
                                     -------

            16.     Exhibits, Financial Statement Schedules, and Reports on Form 8-K...................          62

</TABLE>

<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 Castle Energy Corporation mean "the Company", 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. Although, as a result of these sales, the Company does not directly own
any operating assets and is not directly involved in any business, it continues
to review potential oil and gas acquisitions and its executive officers are
actively involved with Delta.

        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"). 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 is 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 has not
yet earned any revenues but is actively pursuing potential customers with the
Company's assistance.

                                      -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,
2003, 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 December 1, 2003, the Company's primary assets are as follows:

         a.  Approximately $10,000,000 of unrestricted cash.
         b.  Approximately $4,300,000 of restricted cash.
         c.  1,343,600 shares of common stock of Penn Octane Corporation, a
             public company engaged in the transportation and sale of liquid
             propane gas to Mexico ("Penn Octane").
         d.  9,948,289 common shares of Delta, representing approximately 41% of
             Delta's outstanding common shares.
         e.  A 45% membership interest in Network.

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

                     OIL AND GAS EXPLORATION AND PRODUCTION

General

        On June 1, 1999, the Company consummated the purchase of all of the oil
and gas properties of AmBrit Energy Corp. ("AmBrit"). The oil and gas properties
purchased included interests in approximately 180 oil and gas wells in Alabama,
Louisiana, Mississippi, Montana, New Mexico, Oklahoma, Texas and Wyoming, as
well as undrilled acreage in several of these states. The effective date of the
sale was January 1, 1999. The adjusted purchase price after accounting for all
transactions between the effective date, January 1, 1999, and the closing date
was $20,170,000. The entire adjusted purchase price was allocated to "Oil and
Gas Properties - Proved Properties". Based upon reserve reports initially
prepared by the Company's petroleum reservoir engineers, the proved reserves
(unaudited) associated with the AmBrit oil and gas assets approximated 2,000,000
barrels of crude oil and 12,500,000 mcf (thousand cubic feet) of natural gas,
which, together, approximated 150% of the Company's oil and gas reserves before
the acquisition. In addition, the production acquired initially increased the
Company's consolidated production by approximately 425%.

        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 at the closing market price of $1,937,000.

        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. As of
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.

        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.

                                      -2-
<PAGE>

        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.

        As a result of the sales to Delta and the operator of the Romanian
concessions, the Company no longer directly owns any oil and gas properties. The
Company's only oil and gas interests at September 30, 2003 and December 1, 2003
are those derived from its ownership of Delta, which was approximately 41% at
September 30, 2003.

Properties

        Proved Oil and Gas Reserves

        Since the Company sold all of its oil and gas properties by September
30, 2002, the Company does not directly own any proved oil and gas reserves at
September 30, 2003. Nevertheless, proven oil and gas reserves can indirectly be
attributed to the Company by virtue of the Company's ownership of Delta, which
was approximately 41% at September 30, 2003. Such reserves are included in the
unaudited reserve disclosures in Note 11 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, 2003, including production from acquired properties since the date
of acquisition.
<TABLE>
<CAPTION>
                                                                                       Fiscal Year Ended September 30,
                                                                                ------------------------------------------
                                                                                     2003          2002           2001
                                                                                     ----          ----           ----

          <S>                                                                          <C>       <C>            <C>
        Oil -- Bbls (barrels).................................................          0         179,000        262,000

        Gas -- MCF (thousand cubic feet)......................................          0       2,254,000      3,083,000
</TABLE>

        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.

        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,
                                                                                    --------------------------------
                                                                                    2003         2002         2001
                                                                                    ----         ----         ----
         <S>                                                                         <C>         <C>           <C>
       Average Sales Price per Barrel of Oil..................................       N/A         $21.51       $27.39

       Average Sales Price per MCF of Gas.....................................       N/A         $ 2.48       $ 4.53

       Average Production Cost per Equivalent MCF(1)..........................       N/A         $  .98       $ 1.59
</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 2001 or fiscal 2002.

                                      -3-
<PAGE>


        No sale price or production cost data are included in the above data for
the period June 1, 2002 to September 30, 2003 because the Company sold all of
its producing oil and gas properties to Delta on May 31, 2002.

        Productive Wells and Acreage

        The Company did not directly own any productive wells or acreage at
September 30, 2003, having sold all its interests in wells and acreage to Delta
on May 31, 2002.

        Drilling Activity

        The table below sets forth for each of the three fiscal years in the
period ended September 30, 2003 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,
                  --------------------------------------------------------------------------------------------------------
                                 2003                                 2002                             2001
                  ------------------------------------  -------------------------------- ---------------------------------
                    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       --      --       17       4      --        --

    Net..........       --       --      --        --       --       1       --      --        4       1.3    --        --

 Exploratory:

    Gross........       --       --      --        --       --      --       --      --       --       --     --         3*

    Net..........       --       --      --        --       --      --       --      --       --       --     --       1.5*
</TABLE>

        *   One well, in which the Company had a fifty percent (50%) interest,
            produced some volumes of natural gas when tested but the Company was
            not able to obtain a price for its production that made future
            operations economical.

        The Company participated in no drilling after May 30, 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 regulation 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 was also subject to various state and Federal laws regarding
environmental and ecological matters because it acquired, drilled and operated
oil and gas properties. To alleviate the environmental risk, the Company carried
$25,000,000 of liability insurance and $3,000,000 of special operator's extra
expense (blowout) insurance for wells it drilled. Since the Company does not
currently directly own oil and gas properties, the Company does not carry
operations expense insurance and has reduced its liability coverage to
$1,000,000.

        As a result of the sale of all of its oil and gas properties to Delta on
May 31, 2002, the Company is currently no longer directly subject to regulations
governing oil and gas production and exploration.

        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. See Items 3 and 7 of this Form 10-K and Note 12 to the consolidated
financial statements included in Item 8 of this Form 10-K.

                                      -4-
<PAGE>


                         EMPLOYEES AND OFFICE FACILITIES

        As of December 1, 2003, the Company and one of its subsidiaries employed
six 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

       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 Notes 13 and 22 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, Inc.
(collectively, "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 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, IRLP sold its refinery, the Indian Refinery, to
American Western Refining Limited Partnership ("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.

                                      -5-
<PAGE>


        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 $20,500,000.

        The Company's general counsel subsequently corresponded with
ChevronTexaco and the Company voluntarily provided a number of documents
requested by ChevronTexaco. In June 2002, ChevronTexaco's counsel indicated to
the Company's general counsel 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 Federal District Court has set a presumptive trial date for
this matter for December 13, 2004, but the actual trial date could be in 2005 or
later due to a crowded docket in the district. The Company does intend to pursue
all available opportunities for early dismissal of this matter, including
requests for summary judgement 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.

                                      -6-
<PAGE>

        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 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 and final 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

         On July 31, 2003, the 12th Court of Appeals in Tyler, Texas reversed
and remanded the trial court's judgment against the Company in this matter,
while affirming the award on the counterclaim made by one of the Company's
subsidiaries.

         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 interests billings plus interest, attorneys' fees and court costs.

                                      -7-
<PAGE>



         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 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 rehearing on
certain rulings to the 12th Court of Appeals. That Court denied both motions for
rehearing.

         To pursue the 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 attorney's fees, and to maintain that bond until the
resolution of the appeals. Originally, the Company and its subsidiaries
anticipated posting a bond of approximately $3,000,000 based upon the net amount
of damages but the Company and its subsidiaries later decided to post a bond of
$3,886,000 based upon the gross damages in order to avoid on-going legal
expenses and to expeditiously move the case to the Tyler Court of Appeals. The
certificate of deposit, including accumulated interest, supporting the bond was
$4,075,000 as of September 30, 2003. The letter of credit supporting this bond
was provided by the Company's lender pursuant to the Company's line of credit
with that lender, and such letter of credit was supported by a certificate of
deposit of the Company. The certificate of deposit will remain restricted until
all appeals have been completed. Having sold all of its domestic oil and gas
properties, the Company no longer directly owns any oil and gas assets with
which to collateralize the bond.

         The Long Trusts have filed a petition for review with the Supreme Court
of Texas. The Texas Supreme Court grants only a small percentage of petitions
for review that are filed. Should the Long Trusts' petition for retrial for
review be denied and their breach of contract claims be retried, the Company
will vigorously defend against them. Based on the evidence presented at the
initial trial, the Company believes such claims, even if decided adversely to
the Company, will not result in a material loss to the Company. Because the Long
Trusts have filed a petition for review with the Supreme Court of Texas, the
Company will be required to maintain its appeal bond until 30 days following a
decision by the Supreme Court, which could be in the spring or summer of 2004 if
the petition is denied or longer if the petition is granted. When all appeals
are completed and if there are no changes to the decision by the Court of
Appeals decision by the Supreme Court of Texas, CTPLP will be permitted to
enforce its judgment against the Long Trusts.

         The Company has not accrued any recoveries for this litigation but will
record recoveries, if any, when realized.

         Pilgreen Litigation

         As part of the oil and gas properties acquired from 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.) 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.

                                      -8-
<PAGE>



         CTOGLP has also been informed that production proceeds from an
additional well on the Simpson lease in which CTOGLP has a 5.325% overriding
royalty interest have been suspended by the court 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.

         The Company's policy with respect to any amounts recovered is to record
them as income only when and if such amounts are actually received.

         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 preliminarily estimates the amount in controversy to be
approximately $1,180,000. Dominion threatened to suspend all revenue payable to
the Company from the Mitchell and Migl-Mitchell to offset its claim. The Company
and Dominion are currently examining 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.

         On or about July 19, 2003, Dominion filed a motion for partial summary
judgement concerning the Company's claim that it had assumed the liabilities of
its predecessor in interest. On July 28, 2003, CTOGLP filed its response to
Dominion's motion as well as its own cross motion for partial summary judgement.
In September 2003, the District Court of Lavaca County granted Dominion's motion
for partial summary judgement.

         The Company is contesting this matter vigorously and believes that
Dominion's claims are without merit and has accordingly made no provision for
Dominion's claim in its September 30, 2003 financial statements.


                                      -9-
<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 2003.



                                      -10-
<PAGE>


                                     PART II


ITEM 5.  MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
         MATTERS

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 three
fiscal years ended September 30, 2003.
<TABLE>
<CAPTION>
                                                                      2003                2002                 2001
                                                                ----------------    ----------------      ---------------
                                                                 High      Low       High       Low        High     Low
                                                                 ----      ---       ----       ---        ----     ---
         <S>                                                      <C>       <C>       <C>        <C>        <C>      <C>
        First Quarter (December 31).........................     $4.35     $3.65     $7.24      $4.46      $7.73    $5.92
        Second Quarter (March 31)...........................     $4.00     $2.98     $6.99      $5.20      $6.94    $5.60
        Third Quarter (June 30).............................     $4.95     $3.10     $6.85      $5.59      $6.92    $5.67
        Fourth Quarter (September 30).......................     $5.95     $4.50     $6.82      $3.64      $6.47    $4.21
</TABLE>

         The final sale of the Company's Common Stock as reported by the NNM on
December 1, 2003 was at $5.82.

        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, 2003, 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,
2003 is as follows:
<TABLE>
<CAPTION>
                                                                                             Weighted          Number of
                                                                            Number of         Average         Securities
                                                                            Securities       Exercise          Remaining
                                                                           to be Issued      Price of          Available
                                                                           Upon Exercise    Outstanding           for
                                                                          of Outstanding     Options,          Issuance
                                                                             Warrants        Warrants            Under
                                                                            and Rights      and Rights      Equity Plan (1)
                                                                          --------------    ----------      ---------------

          <S>                                                                   <C>           <C>               <C>
       Equity compensation plans approved by security holders.....              652,500       $5.61             1,035,000
       Equity compensation plans not approved by security
          holders.................................................               60,000       $3.79
                                                                                -------                         ---------
       Total......................................................              712,500       $5.46             1,035,000
                                                                                =======                         =========
</TABLE>

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


                                      -11-

<PAGE>


        The Company's 1992 Equity Incentive Plan was approved by shareholders
and adopted by the Company in 1993. The other options issued were not pursuant
to any plan. (See Note 16 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, 2003, 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, 2003. 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,
                                                         ----------------------------------------------------------------------
                                                                       (in Thousands, except per share amounts)
                                                             2003          2002          2001          2000          1999
                                                         ------------- ------------- ------------- ------------- --------------
<S>                                                           <C>              <C>         <C>            <C>           <C>
Net sales:
    Natural gas marketing and transmission..........                                                                   $50,067
    Exploration and production......................                         $9,445       $21,144       $17,959         $7,190
Gross Margin:
    Natural gas marketing and transmission (gas
      sales less gas purchases).....................                                                                   $19,005
    Exploration and production (oil and gas sales less
      production expenses)..........................                         $6,178       $13,745       $11,765         $4,802
Income (Loss) before Provision for (Benefit of)
   Income Taxes                                              ($2,350)       ($ 759)        $2,097        $2,778        $11,222
Net Income (Loss) from Continuing Operations per
   Share Outstanding (Diluted)......................           ($.30)        ($.28)          $.25          $.71           $.99
Dividends Declared per Common Share
    Outstanding.....................................             $.20          $.15          $.20          $.20           $.25
</TABLE>


<TABLE>
<CAPTION>
                                                                                    September 30,
                                                         ----------------------------------------------------------------------
                                                             2003          2002          2001          2000          1999
                                                         ------------- ------------- ------------- ------------- --------------
<S>                                                           <C>           <C>           <C>           <C>            <C>
Total assets........................................          $49,808       $51,941       $59,118       $63,295        $60,796
Long-term obligations...............................                0             0             0             0              0
Redeemable preferred stock..........................                0             0             0             0              0
Capital leases......................................                0             0             0             0              0
</TABLE>

      Share data have been retroactively restated to reflect the 200% stock
dividend that was effective January 31, 2000.

                                      -12-
<PAGE>


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

                   ("$000's" Omitted Except 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 a subsidiary of EMC 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.

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 does not directly
own any operating assets. 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 4 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.

      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:

                                      -13-
<PAGE>
<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 currently owns approximately 41% of Delta. 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 includes 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 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.

Fiscal 2002 versus Fiscal 2001

Exploration and Production

      As noted above, the Company sold all of its domestic oil and gas
properties to Delta on May 31, 2002. As a result, the following exploration and
production financial data for the year ended September 30, 2002 represent only
eight months of revenue and expense whereas the data for the year ended
September 30, 2001 represent a full twelve months of revenue and expense.




                                      -14-


<PAGE>
<TABLE>
<CAPTION>

                                                                                     Fiscal Year Ended September 30,
                                                                                 --------------------------------------
                                                                                        2002               2001
                                                                                 ------------------ -------------------
             <S>                                                                            <C>                  <C>
            Production Volumes:
            -------------------
                  Barrels of crude oil (net).................................              179,000             262,000
                  Mcf (thousand cubic feet) of natural gas (net).............            2,254,000           3,083,000
                  Mcf equivalents (net) (mcfe) *.............................            3,328,000           4,655,000

            Oil/Gas Prices:-
            ----------------
                  Crude Oil/Barrel:
                  -----------------
                  Gross......................................................               $21.51              $27.39
                  Hedging effects............................................
                                                                                            ------              ------
                  Net of hedging.............................................               $21.51              $27.39
                                                                                            ======              ======


                  Natural Gas/Mcf:
                  ----------------
                  Gross......................................................                $2.48              $ 4.53
                  Hedging effects............................................
                                                                                            ------              ------
                  Net of hedging.............................................                $2.48              $ 4.53
                                                                                            ======              ======

            Oil and Gas Production Expenses/Mcf Equivalent...................                $ .98              $ 1.59
                                                                                            ======              ======
</TABLE>

      ------------
      *  Barrels of crude oil have been converted to mcf based upon relative
         energy content of 6 MCF of natural gas per barrel of crude oil.

      Oil and gas sales decreased approximately $5,670 from fiscal 2001 to
fiscal 2002 due to significant decreases in oil and gas prices. The average
price per mcfe decreased from $4.54/mcfe for the year ended September 30, 2001
to $2.84/mcfe for the year ended September 30, 2002. The decline in the price
received for natural gas was especially precipitous. For the year ended
September 30, 2001, the average price received per mcf of natural gas sold was
$4.53 versus only $2.48 per mcf for the year ended September 30, 2002.

      Oil and gas sales decreased approximately $6,029 as a result of decreases
in oil and gas production. The production decreases were caused primarily by the
sale of the Company's domestic oil and gas properties to Delta on May 31, 2002.
From the year ended September 30, 2001 to the year ended September 30, 2002 oil
production decreased by approximately 83,000 barrels and natural gas production
decreased by 829,000 mcf.

      As a result of the $5,670 decrease in oil and gas sales due to a decrease
in oil and gas prices and the $6,029 decrease due to a decrease in oil and gas
production, there was a net decrease of $11,699 or 55.3% in oil and gas sales
from the year ended September 30, 2001 to the year ended September 30, 2002.

      Oil and gas production expenses decreased $4,132 or 55.8% from fiscal 2001
to fiscal 2002. A significant portion of the decrease is attributable to the
sale of the Company's domestic oil and gas properties to Delta on May 31, 2002,
resulting in only eight months of production expense during the year ended
September 30, 2002 versus twelve months of production expenses during the year
ended September 30, 2001. For the year ended September 30, 2002, such expenses
were $.98 per equivalent mcf of production versus $1.59 per equivalent mcf of
production for the year ended September 30, 2001. The decrease in production
expenses per equivalent mcf is primarily attributable to a higher volume of
nonrecurring repairs and maintenance incurred during the year ended September
30, 2001 than were incurred during the year ended September 30, 2002. The higher
level of repairs and maintenance expenses incurred during the year ended
September 30, 2001 related primarily to the wells acquired from AmBrit in June
1999 since it appeared AmBrit did not repair such wells pending their sale to
the Company. Furthermore, oil and gas production expenses are typically not
incurred ratably throughout any given year but are incurred when and if certain
wells require repair and maintenance. As a result, such comparisons are more
appropriate on a multi-year basis than on an annual basis.

                                      -15-

<PAGE>


      General and administrative expenses increased $34 or .6% from the year
ended September 30, 2001 to the year ended September 30, 2002. General and
administrative expenses increased $998 as a result of severance expenses
primarily related to employees who were terminated or whose compensation was
reduced as a result of the sale of the Company's oil and gas properties to
Delta. Legal fees also increased significantly as a result of the Texaco lawsuit
(see Item 3 of this Form 10-K). These increases were partially offset by
decreased insurance and compensation expenses and by $181 of non-recurring costs
incurred during the year ended September 30, 2001 related to a previous effort
by the Company to sell its oil and gas properties that terminated in December
2000 without a sale. These offsetting factors resulted in the net increase of
$34.

      Depreciation, depletion and amortization decreased $319 or 9.2% from
fiscal 2001 to fiscal 2002. This net decrease consists of a decrease of $43 in
depreciation of equipment and furniture and fixtures from $122 to $79 and a $276
decrease in depletion of oil and gas properties from $3,348 to $3,072. For the
year ended September 30, 2002, the depletion rate was $.92 per mcfe versus $.72
per mcfe for the year ended September 30, 2001. The increase in the depletion
rate is indirectly attributable to the significant decreases in oil and gas
prices that occurred between the two periods being compared. The reserve reports
used to compute depletion rates are prepared annually as of September 30, the
Company's fiscal year end. As a result of lower oil and gas prices at September
30, 2001 as compared to those at September 30, 2000, the Company's economic oil
and gas reserves decreased significantly and the resultant cost per mcfe and
depletion rate per mcfe increased significantly. The Company did not cause its
reserves to be evaluated at September 30, 2002, having sold all of its domestic
oil and gas properties to Delta on May 31, 2002 (see Note 4 to the consolidated
financial statements).

      Interest income decreased $484 from fiscal 2001 to fiscal 2002. The
decrease was caused by a significant decrease in the average balance of invested
cash and a decrease in the rate of interest earned on such invested cash.

      The following operating items for the year ended September 30, 2002 have
no counterpart for the year ended September 30, 2001:

             Gain on sale of domestic oil and gas properties     $1,295
                                                                 ======
             Loss on sale of unproved Romanian properties       ($  311)
                                                                 ======

      The $1,295 gain recorded on the Delta sale is analyzed in Note 4 to the
consolidated financial statements included in Item 8 of this Form 10-K. The $311
loss on the sale of the unproved Romanian properties results from the Company's
sale of its remaining interest in Romania. The Company had originally intended
to participate in a wildcat well in the Black Sea but instead sold its interest
before drilling commenced. The Company has been informed that such drilling
subsequently resulted in a dry hole.

      The following other income (expense) items for the year ended September
30, 2002 are primarily related to the sale of the Company's domestic oil and gas
properties to Delta at May 31, 2002 and have no counterpart during the year
ended September 30, 2001.
<TABLE>
<CAPTION>
                <S>                                                                                 <C>
            Impairment provision - marketable securities..................................       ($  388)
            Equity in loss of Delta Petroleum Company before June 1, 2002.................       ($  165)
            Equity in loss of Delta Petroleum Company after May 31, 2002..................       ($  433)
            Decrease in fair value of option granted to Delta Petroleum Corporation.......        $2,250
</TABLE>

      The impairment provision for marketable securities relates to 382,289
shares of Delta's common stock acquired by the Company in September 2000. The
provision consists of a $204 impairment provision recorded in the quarter ended
March 31, 2002 and a $184 provision recorded effective May 31, 2002 to reduce
the book value of the 382,289 shares of Delta then owned by the Company to
market value prior to accounting for the Company's investment in Delta using the
equity method of accounting. The $2,250 decrease in the value of the option
granted to Delta is the result of a decrease in the fair value of the option
which, in turn, resulted from a decrease in Delta's share price. The equity in
the estimated losses of Delta represent the Company's share of Delta's estimated
losses. The loss prior to May 31, 2002 is applicable only to the 382,289 shares
of Delta owned by the Company before May 31, 2002 and approximates 3.4% of
Delta's losses for the period from October 1, 2001 to May 31, 2002. The loss
after May 31, 2002 applies to all 9,948,289 shares of Delta owned by the Company
after the closing of the Delta transaction on May 31, 2002. These shares
represent approximately 44% of Delta's outstanding shares.

      The Company's equity in the loss of Network increased $77 from $99 for the
year ended September 30, 2001 to $176 for the year September 30, 2002. The
increase results from increased expenses incurred by Network, a start up company
that has not yet earned operating revenue. The Company owns 45% of Network.

                                      -16-
<PAGE>



      The $1,085 tax provision for the year ended September 30, 2002 results
primarily because of changes in the Company's expectations that it will not
generate future taxable income. The Company increased its valuation allowance by
$1,345 at September 30, 2002, resulting in a deferred tax asset, net of $274 of
accrued income taxes on appreciation of marketable securities, of $521. The net
deferred tax asset at September 30, 2002 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 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, 2003, the Company used $3,480 in
operating activities. During the same period the Company invested $125 in
Network and paid $1,321 for dividends to stockholders. At September 30, 2003,
the Company had $10,615 of unrestricted cash, $18,139 of working capital, no
long-term debt and no operating assets or operating revenues, having sold all of
its domestic oil and gas properties to Delta on May 31, 2002 and its Romanian
oil and gas concessions to the operator of those concessions in September 2002.

      At the present time the two most likely alternative courses of future
action for the Company are liquidation and continuing to operate. As noted in
previous public filings, the most likely course of action appears to be
liquidation given the Company's lack of operating assets and the ever-increasing
regulatory, legal, accounting and administrative costs of being a public
company. The Company's Board of Directors has not, however, adopted a plan of
liquidation given the lawsuit filed by ChevronTexaco. (See Note 4 to the
consolidated financial statements.) The Company's general counsel, management
and special counsel believe ChevronTexaco's claims are without merit and that
ChevronTexaco is using the legal system to disrupt the Company's business
activities and to coerce the Company to pay ChevronTexaco a settlement in order
to allow the Company to liquidate or conduct future operations. The Company
expects that it will incur significant legal costs to defend itself against
ChevronTexaco's lawsuit. The Company's management and Board of Directors are
continuously monitoring the legal situation. Since the Company's Board of
Directors has discussed but not yet adopted a plan of liquidation, the future
impacts of both liquidation and continuing operations are discussed below.

LIQUIDATION

      If a decision is made to liquidate, the Company anticipates that it would
distribute some cash and Delta shares to its stockholders in complete
liquidation of their stock as soon as possible while retaining sufficient assets
to reasonably provide for existing and anticipated future liabilities, including
those related to the contingent and litigated environmental claims and other
current litigation. Such provision would include sufficient assets to provide a
reasonable reserve for the Company's other outstanding litigation liabilities,
if any, including any outstanding contingent environmental litigation and other
liabilities. If any net assets remain after the Company pays or provides for
such remaining liabilities, the net proceeds of such assets would then be
distributed to stockholders as a final distribution. The Company would probably
also file a no action letter with the SEC seeking relief from continuing SEC
reporting requirements. Such a plan of liquidation or any other plan of
liquidation would be subject to prior approval by the Company's stockholders.
The primary risks associated with such a liquidation scenario are as follows:

        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 liabilities with respect to any of
             these lawsuits, any or several of the plaintiffs in these lawsuits
             could undertake legal actions to prevent the Company from making
             liquidating distributions to its stockholders. Any resulting
             litigation could not only cause the Company to incur significant
             legal costs but could also delay any distributions to stockholders
             for years and/or reduce or eliminate entirely such distributions.
             If ChevronTexaco were to prevail on its indemnity claim in its
             lawsuit (Note 4 to the consolidated financial statements),
             ChevronTexaco's recovery could conceivably exceed the Company's net
             worth and prevent liquidating distributions to stockholders.
             ChevronTexaco could also conceivably sue larger stockholders of the
             Company after a distribution had been made. In addition, even if
             the Company's stockholders approve any future plan of liquidation,
             dissident stockholders of the Company could conceivably also take
             legal actions to prevent the Company from implementing any
             liquidation plan.


                                      -17-
<PAGE>


         b.  Tax Risks - As a result of the Delta transaction, the Company
             received 9,566,000 shares of Delta's common stock in addition to
             the 382,289 shares of Delta common stock it previously owned. If
             Delta's stock price increases significantly before any distribution
             to stockholders, the Company could be subject to federal and state
             income tax at the corporate level on the interim appreciation of
             Delta's stock if the Company's remaining tax carryforwards are not
             sufficient to offset income taxes on such appreciation. Under such
             circumstances the tax treatment would be the same as if the Company
             had sold its Delta shares for their fair market value and then
             distributed the proceeds to its stockholders. Such could be the
             case if there are delays in making distributions to stockholders
             and Delta's stock price increases in the interim. Any resulting
             gain would essentially constitute phantom income to the Company
             since the Company would realize a taxable gain without receiving
             any related proceeds.

         c.  Continuing Public Company Administrative Burden - If the Company's
             directors decide to liquidate, the Company will probably seek
             relief from most of its public company reporting requirements. If
             such a request is denied by the SEC, the Company would continue
             incurring the costs of being a public company while having no
             operating revenues to absorb such costs. Such costs are significant
             and probably will increase in the future given the myriad of post
             Enron regulatory requirements that are currently being mandated.
             The result would be a diminution of assets available for
             distribution to stockholders.

         d.  Lack of Liquidity - If the Company's directors decide to liquidate
             and the related plan of liquidation is approved by the Company's
             stockholders, it is likely that the Company's stock would cease to
             trade after the plan of liquidation is approved. In either case,
             stockholders would not be able to trade their stock. Stockholders
             who have used their Company stock as collateral for margin loans
             would probably be required to provide other collateral to support
             such loans. Even if the Company is able to distribute Delta stock
             as part of its initial distribution to stockholders without any
             legal challenges or other delays, there could be a delay between
             the date the Company's stock is delisted and the date when the
             Company's stockholders receive Delta shares that could be
             substituted as collateral for a margin loan. Stockholders would
             presumably have to provide other collateral in the interim.

         e.  Liquidation of Assets - The Company's primary remaining assets
             consist of cash and cash equivalents and the Company's investments
             in Penn Octane Corporation (1,343,600 shares) and Delta (9,948,289
             shares). Although most of the Company's shares of Penn Octane are
             already registered, Penn Octane is a thinly capitalized company
             with small trading volumes and the Company may not be able to sell
             its Penn Octane stock for its listed market prices if the Company
             needs cash to distribute to its stockholders or to liquidate
             liabilities. In addition, the Company owns 45% of Network. Network
             is a private development stage limited liability company with no
             public market for its membership units. As a result, the Company
             expects that it would be difficult at the present time to sell its
             interest in Network if liquidation is required.

CONTINUING TO OPERATE

        If the Company does not liquidate but instead continues to operate, the
Company would still be subject to several of the risks noted above, including
litigation risk, the continuing public company administrative burden and the
lack of liquidity. The Company estimates that its annual general and
administrative costs, if it continues to exist as a public company, would be at
least $700-$900, excluding litigation - related legal costs. In addition, the
Company would lack operating assets and a business to operate. In addition, the
Company may not be able to hire sufficient experienced staff to operate such
assets, having severed most of its personnel in fiscal 2002. Under such
circumstances, the Company would be subject to many competitive disadvantages if
it again decides to acquire energy assets or other assets and businesses. For
example, few analysts believe it is possible to acquire oil and gas properties
at favorable prices at the present time or in the near future given current high
prices for oil and gas production and reserves. Many energy companies have more
financial resources than the Company and could easily outbid the Company in such
an acquisition scenario. Furthermore, the Company must be engaged primarily in a
business other than that of investing, reinvesting, owning, holding or trading
in securities to avoid becoming subject to federal regulation under the
Investment Company Act of 1940 ("Investment Act"). Although the Company and its
general counsel do not believe the Company is an investment company within the
meaning of the Investment Act, a future determination that the Company is
subject to the Investment Act would result in even more significant regulatory
compliance costs and obligations.

      In addition, if the Company continues to operate, it would continue to be
subject to the following risk factors:

         a.  Contingent and litigated environmental liabilities (see Note 4 to
             the consolidated financial statements).

         b.  Public market for Company's stock - the small trading volumes in
             the Company's stock may create liquidation problems for large
             investors in the Company.

                                      -18-
<PAGE>



         c.  Other risks including general business risks, insurance claims
             against the Company in excess of insurance coverage, tax
             liabilities resulting from tax audits and litigation risk.

      Although the Company has reviewed and sought to acquire oil and gas assets
during fiscal 2003, the Company has not been successful in such acquisitions.
The prices paid by successful bidders has been higher than that the Company
would be willing to pay. Nevertheless, since the resolution of the ChevronTexaco
litigation appears more distant, the Company is increasing its effort to acquire
oil and gas or other energy-related assets if such assets can be acquired on
favorable terms.

QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

      The Company currently owns no oil or gas reserves and is thus no longer
directly subject to market risks with respect to oil and gas prices.

      At September 30, 2003 and December 1, 2003, the Company owned 9,948,289
shares of Delta and 1,343,600 shares of Penn Octane. Penn Octane is a thinly
traded public company with a small market capitalization. The stock price of
Penn Octane has fluctuated significantly in the last three years and thus the
Company's investment in Penn Octane remains subject to significant changes in
the market prices of these stocks and limited liquidity.

INFLATION AND CHANGING PRICES

      The Company currently has no active business and thus does not expect
inflation and changing prices to affect its future results of operations in a
material manner.

NEW ACCOUNTING PRONOUNCEMENTS

         Statement of Financial Accounting Standards No. 141, "Business
Combinations" ("SFAS No. 141") and Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142") were issued in
July 2001. SFAS No. 141 requires that all business combinations entered into
subsequent to June 30, 2001 be accounted for under the purchase method of
accounting and that certain acquired intangible assets in a business combination
be recognized and reported as assets apart from goodwill. SFAS No. 142 requires
that amortization of goodwill be replaced with periodic tests of the goodwill's
impairment at least annually in accordance with the provisions of SFAS No. 142
and that intangible assets other than goodwill be amortized over their useful
lives. The Company adopted SFAS No. 141 in July 2001 and adopted SFAS No. 142 on
October 1, 2002. Amortization of goodwill for the years ended September 30, 2003
and 2002 was $0 and $9, respectively.

      In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement 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 cost 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 any material effect on the Company's financial
position or results of operations since the Company disposed of its long-lived
assets, its oil and gas properties, to which SFAS No. 143 would have applied, in
May 2002.

      In August 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS No. 144"), which is effective for financial statements issued for
fiscal years beginning after December 15, 2001 and interim periods within those
fiscal years. SFAS No. 144 requires that long-lived assets to be disposed of by
sale be measured at the lower of the carrying amount or fair value less cost to
sell, whether reported in continuing operations or in discontinued operations.
SFAS No. 144 broadens the reporting of discontinued operations to include all
components of an entity with operations that can be distinguished from the rest
of the entity and that will be eliminated from the ongoing operations of the
entity in a disposal transaction. The Company adopted SFAS No 144 effective
October 1, 2002. The Company's adoption of this statement has not had any effect
on its financial position or results of operations and the Company does not
anticipate that adoption of this statement will have any future effect on its
financial position or results of operations.


                                      -19-
<PAGE>


      Statement of Financial Accounting Standards No. 145, "Recision of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections" ("SFAS No. 145") was issued in April 2002. This statement rescinds
SFAS No. 4, Reporting Gains and Losses from Extinguishment of Debt, which
required all gains and losses from extinguishment of debt to be aggregated and,
if material, classified as an extraordinary item, net of income taxes. As a
result, the criteria in Accounting Principles Board No. 30 ("APB 30") will now
be used to classify those gains and losses. Any gain or loss on the
extinguishment of debt that was classified as an extraordinary item in prior
periods presented that does not meet the criteria in APB 30 for classification
as an extraordinary item shall be reclassified. The provisions of this Statement
are effective for fiscal years beginning after January 1, 2003 and the Company
adopted SFAS No. 145 on October 1, 2003. The Company does not expect at this
time that adoption of this statement will have a material effect on its future
financial position or results of operations.

      Statement of Financial Accounting Standards No. 146, "Accounting for Exit
or Disposal Activities" ("SFAS No. 146"), was issued in June 2002. SFAS No. 146
addresses significant issues regarding the recognition, measurement and
reporting of disposal activities, including restructuring activities that are
currently accounted in Emerging Issues Task Force Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Activity." The provisions of SFAS
146 are effective for exit or disposal activities initiated after December 31,
2002. The Company adopted SFAS 146 on January 1, 2003. SFAS No. 146 has not had
any impact on the Company's financial condition or results of operations to date
and the Company does not presently expect SFAS No. 146 to have any affect on its
future financial position or results of operations.

      In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure, an Amendment of FASB
Statement No. 123" ("SFAS No. 148"). This Statement amends FASB SFAS No. 123,
"Accounting for Stock-Based Compensation," to provide alternative methods of
transition for a voluntary change to the fair value method of accounting for
stock-based employee compensation. In addition, this Statement amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements. Certain of the disclosure modifications
are required for fiscal years ending after December 15, 2002. Since the Company
has not issued any stock options since January 2002, the provisions of SFAS No.
148 have not had any effect on the Company's financial position or results of
operations.

      In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others, an Interpretation of FASB Statements No.
5, 57 and 107 and a Rescission of FASB Interpretation No. 34" ("Interpretation
No. 45"). This Interpretation elaborates on the disclosures to be made by a
guarantor in its interim and annual financial statements about its obligations
under guarantees issued. The Interpretation also clarifies that a guarantor is
required to recognize, at inception of a guarantee, a liability for the fair
value of the obligation undertaken. The initial recognition and measurement
provisions of Interpretation No. 45 are applicable to guarantees issued or
modified after December 31, 2002. The disclosure requirements are effective for
financial statements of interim and annual periods ending after December 31,
2002. The provisions of Interpretation No. 45 have not had an effect on the
Company's financial position or results of operations to date and the Company
does not presently expect Interpretation No. 45 to have a material effect on the
Company's future financial position or results of operations.

      In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interests Entities, an Interpretation of ARB No. 51" ("Interpretation
No. 46"). This Interpretation addresses the consolidation by business
enterprises of variable interest entities as defined in the Interpretation.
Interpretation No. 46 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 beginning of the first interim or annual reporting period beginning
after June 15, 2003. The Interpretation requires certain disclosures in
financial statements issued after January 31, 2003 if it is reasonably possible
that the Company will consolidate or disclose information about variable
interest entities when the Interpretation becomes effective. The provisions of
Interpretation No. 46 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.

      In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities" ( "SFAS No. 149"). SFAS No.
149 amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities under SFAS No. 133 "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 149 is effective for
contracts entered into or modified after June 30, 2003 and for hedging
relationships designated after June 30, 2003. The Company adopted SFAS No. 149
on July 1, 2003 and SFAS No. 149 has not had any impact on the Company's
financial position or results of operations to date and SFAS No. 149 is not
presently expected to have any impact on the Company's future financial position
or results of operations.

                                      -20-

<PAGE>


      In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity." SFAS
No. 150 changes the accounting for certain financial instruments that, under
previous guidance, issuers could account for as equity. FASB No. 150 requires
that those instruments entered into or modified after May 31, 2002, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003. SFAS No. 150 is not expected to have a material impact on
the Company's future financial position and results of operations.

CRITICAL ACCOUNTING POLICIES:

      The accounting policies critical to the Company in the future, are as
follows:

Equity Method of Accounting

      The Company currently owns approximately 41% of Delta and accounts 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
$6,900 at May 31, 2002 and September 30, 2003. The Company has allocated such
excess to Delta's ownership interests in offshore California leases and the
related 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 Delta may be impaired and the Company may then be
required to recognize the impairment.

Discontinued Refining Operations

      At September 30, 2003, the Company had recorded net refining liabilities
retained of $2,404. As noted in Item 3 to the 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 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.

Future Distributions to Stockholders, If Any

      If the Company's Board of Directors decides to liquidate the Company, it
is probable that the related plan of liquidation would contemplate distributions
to stockholders of shares of Delta common stock and perhaps of other assets of
the Company. If the Company distributes Delta stock or other assets to
stockholders, the Company will first adjust the book value of the assets to be
distributed to their fair market values, if appropriate, for an indicated
impairment of value, recognizing the resultant loss. The Company would then
record the distribution as a charge to retained earnings equal to the book value
of the assets being distributed.

Valuation Allowance for Deferred Income Tax Asset

      At September 30, 2003, the Company recorded a valuation allowance of
$6,416, substantially offsetting its gross deferred tax asset of $7,431 at that
date. That valuation allowance is based upon the Company's assessment that the
Company will not generate future taxable income to utilize all of its gross
deferred tax assets at September 30, 2003 based primarily on the Company's
expectations that it will incur significant general and administrative expenses
liquidating its assets without earning offsetting revenue. In addition, the
Company is a party to several lawsuits, including a complaint for environmental
indemnification, for which the Company has recorded no liabilities except for
$2,404 of net refining liabilities retained. 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. If
circumstances change such that the Company expects future taxable income, the
Company will revise its valuation allowance, resulting in tax recoveries.

                                      -21-
<PAGE>


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. The impairment
provisions were recorded because Network had not entered into any revenue
generating contracts by May 9, 2003.

                                      -22-
<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, 2003, 2002 and 2001...............        24
 Consolidated Balance Sheets as of September 30, 2003 and 2002.............................................        25
 Consolidated Statements of Cash Flows for the Years Ended September 30, 2003, 2002 and 2001...............        26
 Consolidated Statements of Stockholders' Equity  and Other Comprehensive Income for the Years
    Ended September 30, 2003, 2002 and 2001................................................................        28
 Notes to the Consolidated Financial Statements............................................................        29

 INDEPENDENT AUDITORS' REPORT..............................................................................        59
</TABLE>

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



                                      -23-
<PAGE>

                            CASTLE ENERGY CORPORATION
                      CONSOLIDATED STATEMENTS OF OPERATIONS
              ("$000's" Omitted Except Share and Per Share Amounts)

<TABLE>
<CAPTION>
                                                                                     Year Ended September 30,
                                                                           -----------------------------------------------
                                                                                2003             2002            2001
                                                                           ----------------  -------------  --------------

<S>                                                                               <C>              <C>             <C>
 Revenues:
     Oil and gas sales...............................................                          $    9,445      $   21,144
                                                                                               ----------      ----------
                                                                                                    9,445          21,144
                                                                                               ----------      ----------
 Expenses:
     Oil and gas production..........................................                               3,267           7,399
     General and administrative......................................           $    3,565          6,031           5,997
     Depreciation, depletion and amortization........................                   56          3,151           3,470
     Impairment of unproved Romanian properties......................                                               2,765
     Loss on sale of unproved Romanian properties....................                                 311
                                                                                ----------     ----------      ----------
                                                                                     3,621         12,760          19,631
                                                                                ----------     ----------      ----------

 Operating income (loss).............................................               (3,621)        (3,315)          1,513
                                                                                ----------     ----------      ----------

 Other income (expense):
  Gain on sale of oil and gas properties.............................                               1,295
  Interest income....................................................                  255            157             641
  Other income.......................................................                   17             16              42
  Impairment provision - marketable securities.......................                                (388)
  Impairment provision - investment in Network Energy
     LLC                                                                              (480)
  Decrease in fair value of option granted to Delta
     Petroleum Corporation                                                             432          2,250
  Equity in loss of Network Energy LLC...............................                  (20)          (176)            (99)
  Equity in income of Delta Petroleum Corporation....................                1,067           (598)
                                                                                ----------     ----------      ----------
                                                                                     1,271          2,556             584
                                                                                ----------     ----------      ----------

 Income (loss) before provision for (benefit of) income taxes........               (2,350)          (759)          2,097
                                                                                ----------     ----------      ----------

 Provision for (benefit of) income taxes:
     State...........................................................                  (10)            30              11
     Federal.........................................................                 (339)         1,055             370
                                                                                ----------     ----------      ----------
                                                                                      (349)         1,085             381
                                                                                ----------     ----------      ----------

 Net income (loss)...................................................          ($    2,001)       ($1,844)     $    1,716
                                                                                ==========     ==========      ==========

 Net income (loss) per share:
     Basic...........................................................          ($      .30)   ($      .28)     $      .26
                                                                                ==========     ==========      ==========
     Diluted.........................................................          ($      .30)   ($      .28)     $      .25
                                                                                ==========     ==========      ==========

 Weighted average number of common and potential dilutive common shares
  outstanding:
     Basic...........................................................            6,592,884      6,629,376       6,643,724
                                                                                ==========     ==========      ==========
     Diluted.........................................................            6,592,884      6,629,376       6,818,855
                                                                                ==========     ==========      ==========
</TABLE>

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

                                      -24-
<PAGE>


                            CASTLE ENERGY CORPORATION
                           CONSOLIDATED BALANCE SHEETS
              ("$000's" Omitted Except Share and Per Share Amounts)

<TABLE>
<CAPTION>
                                                                                                    September 30,
                                                                                            ------------------------------
                                                                                                 2003           2002
                                                                                            --------------- --------------
     <S>                                                                                           <C>            <C>
                                          ASSETS
   Current assets:
       Cash and cash equivalents......................................................           $10,615       $ 15,539
       Restricted cash................................................................             4,285          4,230
       Accounts receivable............................................................               152            108
       Marketable securities..........................................................             4,088          3,046
       Prepaid expenses and other current assets......................................               112            197
       Note receivable - Networked Energy LLC, net of allowance for doubtful account
        of $126
       Deferred income taxes..........................................................               648            429
                                                                                                 -------       --------
         Total current assets.........................................................            19,900         23,549
   Estimated realizable value of discontinued net refining assets.....................                              612
   Property, plant and equipment, net:
       Furniture, fixtures and equipment..............................................                65            153
   Investment in Network Energy LLC, net of impairment reserve of $354 at
       September 30, 2003.............................................................                              375
   Investment in Delta Petroleum Corporation..........................................            29,477         26,886
   Deferred income taxes..............................................................               366            366
                                                                                                 -------       --------
         Total assets.................................................................           $49,808       $ 51,941
                                                                                                 =======       ========

                           LIABILITIES AND STOCKHOLDERS' EQUITY

   Current liabilities:
       Dividend payable...............................................................             $ 330         $  330
       Accounts payable...............................................................               541            413
       Accrued expenses...............................................................               241            563
       Accrued taxes on appreciation of marketable securities.........................               649            274
       Fair value of options granted to Delta Petroleum Corporation...................                              432
                                                                                                 -------       --------
         Total current liabilities....................................................             1,761          2,012
   Net refining liabilities retained..................................................             2,404          3,016
   Long-term liabilities..............................................................                               11
                                                                                                 -------       --------
         Total liabilities............................................................             4,165          5,039
                                                                                                 -------       --------
   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;
         11,503,904 shares issued at September 30, 2003 and 2002......................             5,752          5,752
       Additional paid-in capital.....................................................            68,532         67,365
       Accumulated other comprehensive income, net of taxes...........................             1,383            487
       Retained earnings..............................................................            36,643         39,965
                                                                                                 -------       --------
                                                                                                 112,310        113,569
       Treasury stock at cost - 4,911,020 shares at September 30, 2003 and 2002.......           (66,667)       (66,667)
                                                                                                 -------       --------
         Total stockholders' equity...................................................            45,643         46,902
                                                                                                 -------       --------
         Total liabilities and stockholders' equity...................................           $49,808       $ 51,941
                                                                                                 =======       ========

</TABLE>
              The accompanying notes are an integral part of these
                        consolidated financial statements

                                      -25-
<PAGE>



                            CASTLE ENERGY CORPORATION
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
              ("$000's" Omitted Except Share and Per Share Amounts)

<TABLE>
<CAPTION>
                                                                                             Year Ended September 30,
                                                                                      -------------------------------------------
                                                                                           2003          2002          2001
                                                                                      -------------- ------------- --------------
<S>                                                                                          <C>          <C>            <C>
Cash flows from operating activities:
 Net income (loss).............................................................           ($2,001)      ($1,844)       $ 1,716
                                                                                           ------        ------        -------
 Adjustments to reconcile net income (loss) to cash provided by (used in)
    operating activities:
    Depreciation, depletion and amortization...................................                56         3,151          3,470
    Write offs - property, plant and equipment.................................                32
    Decrease in fair value of option granted to Delta Petroleum Corporation....              (432)       (2,250)
    Impairment of foreign unproved properties..................................                                          2,765
    Deferred income tax expense (benefit)......................................              (349)        1,085            377
    Gain on sale of domestic oil and gas properties............................                          (1,295)
    Loss on sale of unproved Romanian properties...............................                             311
    Impairment of investment in Network Energy LLC.............................               480
    Impairment of marketable securities........................................                             388
    Equity in (income) loss of Network Energy LLC..............................                20           176             99
    Equity in (income) loss of Delta Petroleum Corporation.....................            (1,067)          598
    Changes in assets and liabilities:
       (Increase) decrease in restricted cash..................................               (55)       (3,860)         1,372
       (Increase) decrease in accounts receivable..............................               (44)        2,678            971
       (Increase) decrease in prepaid expenses and other current assets........                85            80            (26)
       Increase (decrease) in accounts payable.................................               128        (3,130)         1,110
       Increase (decrease) in accrued expenses.................................              (322)          271             27
       Increase in other long-term liabilities.................................               (11)            2              3
                                                                                           ------        ------        -------
          Total adjustments....................................................            (1,479)       (1,795)        10,168
                                                                                           ------        ------        -------
          Net cash flow provided by (used in) operating activities.............            (3,480)       (3,639)        11,884
                                                                                           ------        ------        -------
Cash flows from investment activities:
 Investment in marketable securities...........................................                                            (34)
 Proceeds from sale of oil and gas assets......................................                          15,478             48
 Investment in other oil and gas properties....................................                            (810)       (15,449)
 Investment in Network Energy LLC..............................................              (125)         (150)          (150)
 Purchase of furniture, fixtures and equipment.................................                              (7)           (82)
 Other.........................................................................                 2
                                                                                           ------        ------        -------
          Net cash provided by (used in) investing activities..................              (123)       14,511        (15,667)
                                                                                           ------        ------        -------
</TABLE>

                            (continued on next page)

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

                                      -26-

<PAGE>

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

<TABLE>
<CAPTION>
                                                                                            Year Ended September 30,
                                                                                    ------------------------------------------
                                                                                         2003          2002         2001
                                                                                    -------------- ------------ --------------
<S>                                                                                        <C>            <C>            <C>
Cash flows from financing activities:
 Acquisition of treasury stock ................................................                           (161)          (572)
 Dividends paid to stockholders ...............................................            (1,321)      (1,016)        (1,326)
                                                                                          -------      -------        -------
       Net cash provided by (used in) financing activities.....................            (1,321)      (1,177)        (1,898)
                                                                                          -------      -------        -------
Net increase (decrease) in cash and cash equivalents...........................            (4,924)       9,695         (5,681)
Cash and cash equivalents - beginning of period................................            15,539        5,844         11,525
                                                                                          -------      -------        -------
Cash and cash equivalents - end of period......................................           $10,615      $15,539        $ 5,844
                                                                                          =======      =======        =======

Supplemental disclosures of cash flow information are as follows:
 Cash paid during the period:
   Income taxes................................................................           $    13                     $    11
                                                                                          =======                     =======

 Accrued dividends.............................................................           $   330      $   330        $   331
                                                                                          =======      =======        =======
 Conversion of Penn Octane Corporation note and accrued interest receivable
    to marketable securities...................................................                                       $   521
                                                                                                                      =======
 Unrealized gain (loss) on investment in available-for-sale marketable
     securities................................................................           $   666     ($ 1,113)      ($ 3,071)
                                                                                          =======      =======        =======
 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...............           $ 1,167
                                                                                          =======
</TABLE>


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

                                      -27-

<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, 2003, 2002 and 2001
                                --------------------------------------------------------------------------------------------------
                                                                                Accumulated
                                   Common Stock      Additional                    Other                   Treasury Stock
                                --------------------   Paid-In   Comprehensive Comprehensive   Retained   ------------------
                                  Shares    Amount     Capital      Income      Income (Loss)  Earnings   Shares    Amount    Total
                                ---------- --------- ---------- --------------- ------------- ---------- --------- --------- ------

<S>                                <C>          <C>      <C>            <C>        <C>           <C>       <C>       <C>      <C>
Balance -October 1, 2000.....   11,503,904   $5,752   $ 67,365                       $4,671    $42,422  4,791,020 ($65,934) $54,276

Stock acquired...............                                                                              80,000     (572)    (572)
Dividends declared ($.20 per
 share)......................                                                                   (1,322)                      (1,322)
Comprehensive income:
  Net income.................                                          $1,716                    1,716                        1,716
  Other comprehensive income
  (loss):
     Unrealized gain (loss) on
      marketable securities,
      net of $1,728 tax benefit                                        (3,071)       (3,071)                                 (3,071)
                                                                      --------
                                                                      ($1,355)
                                ----------   ------    -------        ========       ------    -------  --------- --------  -------
Balance - September 30, 2001.   11,503,904    5,752     67,365                        1,600     42,816  4,871,020  (66,506)  51,027

Stock acquired...............                                                                              40,000     (161)    (161)
Dividends declared ($.15 per
 share)......................                                                                   (1,007)                      (1,007)
Comprehensive income (loss):
  Net income (loss)..........                                         ($1,844)                  (1,844)                      (1,844)
  Other comprehensive income
  (loss):
     Unrealized gain (loss) on
      marketable securities,
      net of $626 tax benefit                                          (1,113)      (1,113)                                  (1,113)
                                                                      -------
                                                                       $2,957
                                ----------   ------    -------        ========       ------    -------  --------- --------  -------
Balance - September 30, 2002.   11,503,904    5,752     67,365                          487     39,965  4,911,020  (66,667)  46,902

Issuance of additional stock by
 Delta Petroleum Corporation...                          1,167                                                                1,167
Dividends declared ($.20 per
 share)......................                                                                   (1,321)                      (1,321)
Comprehensive income (loss):
  Net income (loss)..........                                         ($2,001)                  (2,001)                      (2,001)
  Other comprehensive income
  (loss):
    Unrealized gain (loss) on
     marketable securities,
     net of $375 of income
     taxes..................                                              666           666                                     666
    Equity in other comprehensive
     income (loss) of Delta
     Petroleum Corporation, net
     of $129 tax benefit.......                                           230           230                                     230
                                                                      -------
                                                                      ($1,105)
                                ----------   ------    -------        =======        ------    -------  ---------  -------  -------
Balance - September 30, 2003    11,503,904   $5,752    $68,532                       $1,383    $36,643  4,911,020 ($66,667) $45,643
                                ==========   ======    =======                       ======    =======  =========  =======  =======
</TABLE>



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

                                      -28-



<PAGE>


                            Castle Energy Corporation
                   Notes to Consolidated Financial Statements
                   ("$000's" Omitted Except Per Share Amounts)




NOTE 1 - BUSINESS AND ORGANIZATION

        Business

        References to Castle Energy Corporation mean the Company, 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 approximately twenty-three percent
(23%) of the Company's outstanding common stock at September 30, 2003 and
December 1, 2003.

        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 engaged in
exploration and production ("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. As a result of these sales, the Company
does not directly own any operating assets and is not currently directly engaged
in any active business. Nevertheless, as the result of its 41% ownership of
Delta, the Company is still indirectly involved in the exploration and
production business - see Note 4.

        Natural Gas Marketing

        In December 1992, the Company acquired a long-term natural gas sales
contract with Lone Star Gas Company ("Lone Star Contract"). 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 Rusk County,
Texas 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 purchases 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 13), 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 is
distributing 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 12).

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


                                      -29-
<PAGE>

                            Castle Energy Corporation
                   Notes to Consolidated Financial Statements
                   ("$000's" Omitted Except Per Share Amounts)


        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.

        Network Energy LLC

        In August 2000, the Company purchased thirty-five percent (35%) of the
membership interests of Network 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 and made a $125 loan to
Network, increasing its interest to 45%. 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 is a start up company and which has
not yet earned any revenue.

        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 leaning toward
liquidation of the Company and distribution of the Company's assets to its
stockholders. Such liquidation has been suspended as a result of the lawsuit
filed against the Company by ChevronTexaco (see Note 12). As a result of this
lawsuit, the Company has sought acquisitions in the energy industry but has not
yet completed any such acquisitions.

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, 2003, 2002 and 2001 - 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.

                                      -30-
<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 ("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 four to five 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, are computed
separately for the Company's investment in Romania.

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


                                      -31-
<PAGE>

                            Castle Energy Corporation
                   Notes to Consolidated Financial Statements
                   ("$000's" Omitted Except Per Share Amounts)


        Hedging Activities

        The Company has not used hedges during the periods reported.

        Gas Balancing

        Gas balancing activities have been immaterial during the periods
reported.

        Investments In Network and Delta

        The Company's investments in Network and Delta (the Company owned 45% of
Network and approximately 41% of Delta at September 30, 2003) are recorded on
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 as a charge or credit to the Company's investment with the offsetting
entry to "Paid-In-Capital."

        The Company's investment in Network exceeded the fair value of the
Company's share of Network's assets. Such excess was allocated to goodwill and
amortized on a straight-line method over forty (40) years until September 30,
2002. Commencing October 1, 2002, amortization of goodwill was replaced with
periodic tests for impairment at least annually in accordance with the
provisions of Statement of Financial Accounting Standards No. 142 ("SFAS No.
142"). Per SFAS No. 142 the Company was required to perform a transitional
impairment test by March 31, 2003 (See Note 7).

        The Company's investment in Delta exceeded 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
8.)

        If Delta incurs significant recurring losses in the future and/or the
market value of either of its stock declines significantly, the Company's
investments may be impaired and the Company will 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 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.


                                      -32-

<PAGE>
                            Castle Energy Corporation
                   Notes to Consolidated Financial Statements
                   ("$000's" Omitted Except Per Share Amounts)

        Income Taxes

        The Company follows Statement of Financial Accounting Standards No. 109
"Accounting for Income Taxes" ("SFAS No. 109 "). SFAS No. 109 is an accounting
approach that 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 109 generally considers all expected future events other than
anticipated enactments of changes in the tax law or tax rates. SFAS 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 17)

        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 Statement of Operations until the option expired
unexercised on May 31, 2003.

        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

         Statement of Financial Accounting Standards No. 141, "Business
Combinations" ("SFAS No. 141") and Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142") were issued in
July 2001. SFAS No. 141 requires that all business combinations entered into
subsequent to June 30, 2001 be accounted for under the purchase method of
accounting and that certain acquired intangible assets in a business combination
be recognized and reported as assets apart from goodwill. SFAS No. 142 requires
that amortization of goodwill be replaced with periodic tests of the goodwill's
impairment at least annually in accordance with the provisions of SFAS No. 142
and that intangible assets other than goodwill be amortized over their useful
lives. The Company adopted SFAS No. 141 in July 2001 and adopted SFAS No. 142 on
October 1, 2002. Amortization of goodwill for the years ended September 30, 2003
and 2002 was $0 and $8, respectively.

       In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement 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 cost to expense; 4) subsequent measurement of the liability;
and 5) financial statement disclosures. SFAS No. 143 requires that asset
retirement costs 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 any material effect on the Company's financial
position or results of operations since the Company disposed of its long-lived
assets, its oil and gas properties, to which SFAS No. 143 would have applied, in
May 2002.


                                      -33-
<PAGE>
                            Castle Energy Corporation
                   Notes to Consolidated Financial Statements
                   ("$000's" Omitted Except Per Share Amounts)


       In August 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS No. 144"), which is effective for financial statements issued for
fiscal years beginning after December 15, 2001 and interim periods within those
fiscal years. SFAS No. 144 requires that long-lived assets to be disposed of by
sale be measured at the lower of the carrying amount or fair value less cost to
sell, whether reported in continuing operations or in discontinued operations.
SFAS No. 144 broadens the reporting of discontinued operations to include all
components of an entity with operations that can be distinguished from the rest
of the entity and that will be eliminated from the ongoing operations of the
entity in a disposal transaction. The Company adopted SFAS No. 144 effective
October 1, 2002. The Company's adoption of this statement has not had any effect
on its financial position or results of operations and the Company does not
anticipate that adoption of this statement will have any future effect on its
financial position or results of operations.

       Statement of Financial Accounting Standards No. 145, "Recision of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections" ("SFAS No. 145") was issued in April 2002. This statement rescinds
SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt," which
required all gains and losses from extinguishment of debt to be aggregated and,
if material, classified as an extraordinary item, net of income taxes. As a
result, the criteria in Accounting Principles Board No. 30 ("APB 30") will now
be used to classify those gains and losses. Any gain or loss on the
extinguishment of debt that was classified as an extraordinary item in prior
periods presented that does not meet the criteria in APB 30 for classification
as an extraordinary item shall be reclassified. The provisions of this Statement
are effective for fiscal years beginning after January 1, 2003 and the Company
adopted SFAS No. 145 on October 1, 2003. The Company does not expect at this
time that adoption of this statement will have a material effect on its future
financial position or results of operations.

       Statement of Financial Accounting Standards No. 146, "Accounting for Exit
or Disposal Activities" ("SFAS No. 146"), was issued in June 2002. SFAS No. 146
addresses significant issues regarding the recognition, measurement and
reporting of disposal activities, including restructuring activities that are
currently accounted for in accordance with Emerging Issues Task Force Issue No.
94-3, "Liability Recognition for Certain Employee Termination Activity." The
provisions of SFAS No. 146 are effective for exit or disposal activities
initiated after December 31, 2002. The Company adopted SFAS No. 146 on January
1, 2003. SFAS No. 146 has not had any impact on the Company's financial
condition or results of operations to date and the Company does not presently
expect SFAS No. 146 to have any affect on its future financial position or
results of operations.

       In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure, an Amendment of FASB
Statement No. 123" ("SFAS No. 148"). This Statement amends FASB SFAS No. 123,
"Accounting for Stock-Based Compensation," to provide alternative methods of
transition for a voluntary change to the fair value method of accounting for
stock-based employee compensation. In addition, this Statement amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements. Certain of the disclosure modifications
are required for fiscal years ending after December 15, 2002. Since the Company
has not issued any stock options since January 2002, the provisions of SFAS No.
148 have not had any effect on the Company's financial position or results of
operations or related disclosures.

       In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others, an Interpretation of FASB Statements No.
5, 57 and 107 and a Rescission of FASB Interpretation No. 34" ("Interpretation
No. 45"). This Interpretation elaborates on the disclosures to be made by a
guarantor in its interim and annual financial statements about its obligations
under guarantees issued. The Interpretation also clarifies that a guarantor is
required to recognize, at inception of a guarantee, a liability for the fair
value of the obligation undertaken. The initial recognition and measurement
provisions of Interpretation No. 45 are applicable to guarantees issued or
modified after December 31, 2002. The disclosure requirements are effective for
financial statements of interim and annual periods ending after December 31,
2002. The provisions of Interpretation No. 45 have not had an effect on the
Company's financial position or results of operations to date and the Company
does not presently expect Interpretation No. 45 to have a material effect on the
Company's future financial position or results of operations.

                                      -34-

<PAGE>

                            Castle Energy Corporation
                   Notes to Consolidated Financial Statements
                   ("$000's" Omitted Except Per Share Amounts)


       In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51" ("Interpretation
No. 46"). This Interpretation addresses the consolidation by business
enterprises of variable interest entities as defined in the Interpretation.
Interpretation No. 46 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 beginning of the first interim or annual reporting period beginning
after June 15, 2003. The Interpretation requires certain disclosures in
financial statements issued after January 31, 2003 if it is reasonably possible
that the Company will consolidate or disclose information about variable
interest entities when the Interpretation becomes effective. The provisions of
Interpretation No. 46 have not had an effect on the Company's financial position
or 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.

       In April 2003, FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" ("SFAS No. 149"). "SFAS No. 149
amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities under SFAS No. 133 "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 149 is effective for
contracts entered into or modified after June 30, 2003 and for hedging
relationships designated after June 30, 2003. The Company adopted SFAS No. 149
on July 1, 2003. SFAS No. 149 has not had any impact on the Company's financial
position or results of operations to date and SFAS No. 149 is not presently
expected to have any impact on future financial position or results of
operations.

       In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity." SFAS
No. 150 changes the accounting for certain financial instruments that, under
previous guidance, issuers could account for as equity. SFAS No. 150 requires
that those instruments entered into or modified after May 31, 2002, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003. The Company adopted SFAS No. 150 on June 15, 2003. SFAS No.
150 has not had any impact on the Company's financial position or results of
operations to date and is not presently expected to have a material impact on
the Company's future financial condition and results of operations.

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, 2000 to September 30, 2003 is as follows:
<TABLE>
<CAPTION>

                                                                                   Estimated
                                                                               Realizable Value
                                                                                of Discontinued           Net Refining
                                                                             Net Refining Assets      Liabilities Retained
                                                                            ------------------------ -----------------------
           <S>                                                                          <C>                   <C>
      Balance - October 1, 2000.........................................               $800                  $3,204
      Cash transactions.................................................                                        (80)
      Adjustment of vendor liabilities..................................                                         80
      Adjustments resulting from American Western's Plan of
              Liquidation...............................................               (188)                   (188)
                                                                                       ----                  ------
      Balance - October 1, 2001.........................................                612                   3,016
      Adjustment of liabilities.........................................                                       (106)
      Cash transactions.................................................                                        106
                                                                                       ----                  ------
      Balance - September 20, 2002......................................                612                   3,016
      Adjustment of liabilities.........................................                (13)                   (151)
      Cash transactions.................................................               (599)                   (461)
                                                                                       ----                  ------
      Balance - September 20, 2003......................................               $  0                  $2,404
                                                                                       ====                  ======
</TABLE>

        As of September 30, 2003, the estimated value of net refining
liabilities retained consisted of net vendor liabilities of $1,031 and accrued
costs related to discontinued refining operations of $1,831, offset by cash of
$458.

                                      -35-
<PAGE>
                            Castle Energy Corporation
                   Notes to Consolidated Financial Statements
                   ("$000's" Omitted Except Per Share Amounts)

        "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 and
amounts expected to be realized upon the settlement of this net liability. The
actual amounts the Company ultimately realizes or pays could differ materially
from such estimated amounts.

        See Note 12.

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.

        See Note 10.

        East Texas Property Acquisition

        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 were 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. 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 cash plus 9,566,000 shares of Delta's common stock. The $18,236 cash
represented a $20,000 purchase price cash component 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.

                                      -36-
<PAGE>
                            Castle Energy Corporation
                   Notes to Consolidated Financial Statements
                   ("$000's" Omitted Except Per Share Amounts)



        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>
<CAPTION>
              <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>
<CAPTION>
         <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>
       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).

                                      -37-
<PAGE>
                            Castle Energy Corporation
                   Notes to Consolidated Financial Statements
                   ("$000's" Omitted Except Per Share Amounts)


       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 has
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.

       See Note 8.

NOTE 5 - RESTRICTED CASH

        Restricted cash consists of the following:
<TABLE>
<CAPTION>

                                                                                                      September 30,
                                                                                              -----------------------------
                                                                                                   2003          2002
                                                                                              -------------- --------------

<S>                                                                                                <C>            <C>
     Funds supporting letters of credit issued for operating bonds.......................          $ 210          $ 210
     Funds supporting bond posted for Long Trusts Lawsuit, including accrued
        interest of $189 and $134 of September 30, 2003 and 2002, respectively...........          4,075          4,020
                                                                                                  ------         ------
                                                                                                  $4,285         $4,230
                                                                                                  ======         ======
</TABLE>

        The funds supporting letters of credit issued for operating bonds are
being replaced by Delta and it is expected that these funds will no longer be
restricted by March 31, 2004.

        See Note 13 concerning the funds supporting the bond posted for the Long
Trusts Lawsuits.

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's investments in Penn Octane and ChevronTexaco
common stocks 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, 2003:
        Cost..........................................              $2,271             $14           $2,285
        Unrealized gain (loss)........................               1,804              (1)           1,803
                                                                    ------             ---           ------
        Book value (market value).....................              $4,075             $13           $4,088
                                                                    ======             ===           ======

      September 30, 2002:
        Cost..........................................              $2,271             $14           $2,285
        Unrealized gain...............................                 763              (2)             761
                                                                    ------             ---           ------
        Book value (market value).....................              $3,034             $12           $3,046
                                                                    ======             ===           ======
</TABLE>
        The fair market values of Penn Octane and ChevronTexaco common stocks
were based on one hundred percent (100%) of the closing price on the last
trading day in the Company's fiscal year.

        At September 30, 2003 and 2002, the fair market values of the Penn
Octane shares include $45 and $38, respectively, 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 (see Note 16).


                                      -38-

<PAGE>
                            Castle Energy Corporation
                   Notes to Consolidated Financial Statements
                   ("$000's" Omitted Except Per Share Amounts)


        The Company owned 1,343,600 shares of Penn Octane and 177 shares of
ChevronTexaco at September 30, 2003. Of these, 1,067,667 shares of Penn Octane
and the 177 shares of ChevronTexaco were registered. The remaining Penn Octane
shares are either in the process of being registered or the Company has
registration rights with respect to such shares. At September 30, 2003, the
Company also owned options to purchase 74,067 common shares of Penn Octane
common stock at $2.50 per share. These options expire on December 15, 2003.

NOTE 7 - INVESTMENT IN NETWORKED ENERGY LLC/ NOTE RECEIVABLE DUE FROM NETWORK
         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 Equity, increasing its ownership from 35% to 45%. In
addition, the Company loaned Network $125 in fiscal 2003. The Company's
investment in Network and its percentage ownership of Network's membership
interests were as follows:
<TABLE>
<CAPTION>
                                                                                                  September 30,
                                                                                       ---------------------------------
                                                                                              2003              2002
                                                                                       ------------------  -------------

       <S>                                                                               <C>         <C>           <C>
      Investment in Network's Equity........................................            $650                       $650
      Note receivable - Network.............................................                        $125
      Accumulated amortization of goodwill..................................             (23)                       (19)
      Accumulated share of Network's losses.................................            (273)                      (256)
      Impairment provision..................................................            (354)
      Accrued interest receivable...........................................                           1
      Allowance for doubtful account........................................                        (126)
                                                                                        ----        ----           ----
                                                                                                                   $375
                                                                                        ====        ====           ====
</TABLE>

        The components of the Company's equity in Network losses are as follows:
<TABLE>
<CAPTION>
                                                                                          Year Ended September 30,
                                                                                ------------------------------------------
                                                                                       2003         2002          2001
                                                                                --------------- ------------ -------------
               <S>                                                                      <C>          <C>           <C>

         Share of Network's losses, excluding amortization of goodwill.....             $20         $167           $90
         Amortization of goodwill..........................................                            9             9
                                                                                        ---         ----           ---
                                                                                        $20         $176           $99
                                                                                        ===         ====           ===
</TABLE>

        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. 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.

        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.

                                      -39-
<PAGE>
                            Castle Energy Corporation
                   Notes to Consolidated Financial Statements
                   ("$000's" Omitted Except Per Share Amounts)


NOTE 8 - INVESTMENT IN DELTA PETROLEUM CORPORATION

        Changes in the Company's investment in Delta were as follows:
<TABLE>
<CAPTION>
                                                                                            Year Ended September 30,
                                                                                          ------------------------------
                                                                                               2003            2002
                                                                                          --------------- --------------

         <S>                                                                                       <C>            <C>
      Investment - beginning of period...............................................            $26,886
      Investment during the period...................................................                           $27,319
      Share of Delta's income (losses)...............................................              1,067           (433)
      Share of Delta's other comprehensive income (loss).............................                359
      Issuance of additional Delta shares to outsiders at a price different than
         the Company's book value....................................................              1,074
      Share of option expense credited to Delta's paid-in capital                                     91
                                                                                                 -------       -------
      Investment - end of period.....................................................            $29,477       $26,886
                                                                                                 =======       =======
</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, 2003,
the Company owned approximately 41% of Delta's common stock, consisting of
9,948,289 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 $6,900 at May 31, 2002
and September 30, 2003. 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.

        Condensed financial information concerning Delta is as follows:
<TABLE>
<CAPTION>

                                                                                                    September 30,
                                                                                            -------------------------------
                                                                                                 2003           2002
                                                                                            -------------- ----------------
      <S>                                                                                         <C>             <C>

                                Condensed Balance Sheets                                             (Unaudited)

                                         Assets

      Current assets...................................................................          $  7,456         $  8,392
      Oil and gas properties, net......................................................            93,198           66,147
      Other assets.....................................................................               195              432
                                                                                                 --------          -------
                                                                                                 $100,849          $74,971
                                                                                                 ========          =======
                          Liabilities and Stockholders' Equity

      Current liabilities, including current portion of long-term debt.................           $18,029           $7,085
      Long-term liabilities............................................................            27,555           23,584
      Shareholder's equity.............................................................            55,265           44,302
                                                                                                 --------          -------
                                                                                                 $100,849          $74,971
                                                                                                 ========          =======
</TABLE>

                                      -40-
<PAGE>
                            Castle Energy Corporation
                   Notes to Consolidated Financial Statements
                   ("$000's" Omitted Except Per Share Amounts)


<TABLE>
<CAPTION>
                                                                                                 For the Year Ended
                                                                                                   September 30,
                                                                                            -------------------------------
                                                                                                 2003           2002
                                                                                            -------------- ----------------
                                                                                                     (Unaudited)
      <S>                                                                                         <C>               <C>
                           Condensed Statements of Operations

   Revenue:
        Oil and gas sales..............................................................         $27,850          $11,172
        Other..........................................................................          (2,074)             243
                                                                                                -------          -------
                                                                                                 25,776           11,415
                                                                                                -------          -------
   Expense:
        Lease operating expenses.......................................................           9,579            5,877
        General and administrative.....................................................           5,368            3,833
        Depreciation, depletion and amortization.......................................           5,797            4,239
        Other..........................................................................             800            1,998
                                                                                                -------          -------
                                                                                                 21,544           15,947
                                                                                                -------          -------
   Other income (loss).................................................................          (1,728)          (1,360)
                                                                                                -------          -------
   Income (loss) before taxes..........................................................           2,504           (5,892)
   Income taxes........................................................................
                                                                                                -------          -------
   Net income (loss)...................................................................         $ 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, 2003 and 2002
and its unaudited quarterly financial statements for the quarters ended
September 30, 2001, 2002 and 2003.

        Delta' stock is traded on the Nasdaq stock market under the symbol
"DPTR." At September 30, 2003, the closing price of Delta's common stock was
$5.15.

        At September 30, 2003, there were 5,631,987 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, 2003, the Company's
percentage ownership of Delta would decrease to approximately 33%.

NOTE 9 - FURNITURE, FIXTURES AND EQUIPMENT

        Furniture, fixtures and equipment are as follows:
<TABLE>
<CAPTION>
                                                                                                      September 30,
                                                                                            -------------------------------
                                                                                                 2003           2002
                                                                                            -------------- ----------------
          <S>                                                                                     <C>              <C>
        Cost:
             Furniture and fixtures....................................................           $668             $700
             Automobiles and trucks....................................................            269              269
                                                                                                  ----             ----
                                                                                                   937              969
        Accumulated depreciation.......................................................           (872)            (816)
                                                                                                  ----             ----
                                                                                                  $ 65             $153
                                                                                                  ====             ====
</TABLE>

                                      -41-
<PAGE>


                            Castle Energy Corporation
                   Notes to Consolidated Financial Statements
                   ("$000's" Omitted Except Per Share Amounts)



NOTE 10 - OIL AND GAS PROPERTIES (Unaudited)

        The Company sold all of its domestic oil and gas properties to Delta on
May 31, 2002 and sold all of its oil and gas interests in Romania to the
operator of the Romanian concession on September 6, 2002 (see Note 4) and thus
had no oil and gas properties at September 30, 2003. As required by Statement of
Financial Accounting Standards No. 69 "Disclosures about Oil and Gas Producing
Activities," ("SFAS No. 69") the Company has presented its interest in Delta's
results of operations from oil and gas operations.

        The Company's 41% interest in Delta's net capitalized costs at September
30, 2003 was $38,211 (unaudited).

        Capital costs incurred by the Company in oil and gas activities are as
follows:
<TABLE>
<CAPTION>

                                                                   Year Ended September 30,
                                          -----------------------------------------------------------------------------
                                                            2002                                  2001
                                          -------------------------------------- --------------------------------------
                                            United                                 United
                                            States        Romania      Total       States       Romania       Total
                                          ------------- ------------ ----------- ------------ ------------ ------------
                <S>                              <C>          <C>        <C>         <C>           <C>         <C>
        Acquisition of properties:
              Proved properties......                                              $10,002                   $10,002
              Unproved properties....           $154         $221        $375          346                       346
        Exploration..................                                                1,560       $1,428        2,988
        Development..................            434                      434        2,113                     2,113
                                                ----         ----        ----      -------       ------      -------
                                                $588         $221        $809      $14,021       $1,428      $15,449
                                                ====         ====        ====      =======       ======      =======
</TABLE>

        No capital costs were incurred by the Company for the year ended
September 30, 2003.

        For the years ended September 30, 2003 2002 and 2001 the Company
incurred development costs related to booked proved undeveloped reserves of $0,
$434, and $773, respectively.

        The Company's 41% interest in Delta's costs of property acquisition,
exploration and development are as follows:
<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
                                                ======         ====      ======      =======        =====      =======
</TABLE>

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

        The Company's 41% interest in Delta's historical capital 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:

                                      -42-
<PAGE>
                            Castle Energy Corporation
                   Notes to Consolidated Financial Statements
                   ("$000's" Omitted Except Per Share Amounts)
<TABLE>
<CAPTION>

                                                                                                Year Ended September 30,
                                                                                            -------------------------------
                                                                                                 2002            2001
                                                                                            --------------- ---------------
          <S>                                                                                       <C>            <C>
       Revenues:
         Crude oil, condensate, natural gas liquids and natural gas sales..............           $9,445         $21,144
                                                                                                 -------         -------
       Costs and expenses:
         Production costs..............................................................           $3,267          $7,399
         Depreciation, depletion and amortization......................................            3,072           3,348
         Impairment of foreign unproved properties.....................................                            2,765
                                                                                                 -------         -------
         Total costs and expenses......................................................            6,339          13,512
                                                                                                 -------         -------
       Income tax provision (benefit)..................................................            3,313           1,387
                                                                                                 -------         -------
       Income (loss) from oil and gas producing activities.............................          ($  207)        $ 6,245
                                                                                                 =======         =======
</TABLE>

        The income tax provision was 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.

        The Company's 41% 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
                                                                                             ------------------------------
                                                                                                  2003           2002
                                                                                             --------------- --------------
         <S>                                                                                        <C>            <C>
      Income (loss) from oil and gas producing activities...............................          $4,241         ($673)
                                                                                                  ======         =====
</TABLE>
        The Company's 41% 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,
                                                                                            -------------------------------
                                                                                                  2002           2001
                                                                                            ---------------- --------------
            <S>                                                                                    <C>              <C>
        Depletion rate per equivalent MCF of natural gas...............................           $0.92            $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.

        The increase in the depletion rate in fiscal 2002 resulted primarily
because the Company's reserves decreased significantly as a result of lower oil
and gas prices at September 30, 2001. The decrease in reserve quantities without
a similar decrease in related costs resulted in a higher depletion rate. The
decreased reserves affected only the last quarter of fiscal 2001 but affected
the first three quarters of fiscal 2002. Since the Company sold all of its
domestic oil and gas properties to Delta on May 31, 2002, the Company did not
incur depletion costs for the last quarter of fiscal 2002 and did not have any
oil and gas reserves to be evaluated at September 30, 2002. In addition, in
fiscal 2001, the Company acquired significant East Texas reserves at a higher
cost per mcfe than the cost for the Company's existing reserves at the time of
the acquisition.

        See Note 4.

        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.

                                      -43-
<PAGE>

                            Castle Energy Corporation
                   Notes to Consolidated Financial Statements
                   ("$000's" Omitted Except Per Share Amounts)

        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.

        Based on oil and natural gas cash market prices as September 30, 2001,
the Company's costs to be recovered for its domestic reserves exceeded the
related ceiling values by $437. However, the cash market prices of natural gas
subsequently increased significantly. Based on cash market prices of oil and
natural gas as at December 18, 2001, the Company determined that there was no
impairment of its domestic oil and gas properties. Accordingly, the Company did
not record a reduction in the carrying value of its domestic oil and gas
properties at September 30, 2001.

NOTE 11 - 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, Huntley & Huntley
and 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.

      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, 2000........................................                4,735                   44,303
              Acquisitions.............................................                  266                   10,183
              Revisions of previous estimates..........................               (1,730)                 (20,711)
              Production...............................................                 (262)                  (3,083)
                                                                                      ------                   ------
          As of September 30, 2001.....................................                3,009                   30,692
              Production...............................................                 (179)                  (2,160)
              Divestitures.............................................               (2,830)                 (28,532)
                                                                                      ------                   ------
          As of September 30, 2002 and 2003............................
                                                                                      ======                   ======
    Proved developed reserves:
          September 30, 2000...........................................                2,963                   35,815
                                                                                      ======                   ======
          September 30, 2001...........................................                1,890                   26,480
                                                                                      ======                   ======
          September 30, 2002 and 2003..................................
                                                                                      ======                   ======

    Company's 41% interest in reserves of Delta (proved
       developed and undeveloped reserves).............................
          June 30, 2003................................................               22,632                    2,357
                                                                                      ======                   ======
</TABLE>

        The Company did not directly own any oil and gas properties at September
30, 2003 having sold all of its domestic oil and gas properties to Delta on May
31, 2002 (see Note 4).

                                      -44-
<PAGE>


                            Castle Energy Corporation
                   Notes to Consolidated Financial Statements
                   ("$000's" Omitted Except Per Share Amounts)


        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.

        Although the Company participated in the drilling of five wildcat wells
in Romania, no proved reserves were assigned to any of these wells.

        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,
                                                                                                                  2001
                                                                                                            ------------------
          <S>                                                                                                       <C>
        Future cash inflows...........................................................................           $130,289
        Future production costs.......................................................................            (41,193)
        Future development costs......................................................................             (8,585)
        Future income tax expense.....................................................................            (10,892)
                                                                                                                 --------
        Future net cash flows.........................................................................             69,619
        Discount factor of 10% for estimated timing of future cash flows..............................            (33,599)
                                                                                                                 --------
        Standardized measure of discounted future cash flows..........................................            $36,020
                                                                                                                 ========
</TABLE>

        No standardized measure of discounted future cash flows existed at
September 30, 2003 or 2002 because the Company sold all of its domestic oil and
gas properties to Delta on May 31, 2002 (see Note 4).

        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%.

        The following were the sources of changes in the standardized measure of
discounted future net cash flows:
<TABLE>
<CAPTION>
                                                                                                    September 30,
                                                                                          ----------------------------------
                                                                                               2002              2001
                                                                                          ---------------- -----------------

       <S>                                                                                      <C>               <C>
       Standardized measure, beginning of year.......................................          $36,020           $91,119
       Sale of oil and gas, net of production costs..................................           (6,178)          (13,745)
       Net changes in prices.........................................................                            (62,271)
       Sale of reserves in place.....................................................          (32,678)
       Purchase of reserves in place.................................................                              7,662
       Changes in estimated future development costs.................................                              1,518
       Development costs incurred during the period that reduced future development
         costs.......................................................................              434             2,113
       Revisions in reserve quantity estimates.......................................                            (27,596)
       Discoveries of reserves.......................................................
       Net changes in income taxes...................................................                             31,054
       Accretion of discount.........................................................            2,402             9,112
       Other:
          Change in timing of production.............................................                              (944)
          Other factors..............................................................                            (2,002)
                                                                                               -------          -------
       Standardized measure, end of year.............................................          $                $36,020
                                                                                               =======          =======
</TABLE>

                                      -45-
<PAGE>
                            Castle Energy Corporation
                   Notes to Consolidated Financial Statements
                   ("$000's" Omitted Except Per Share Amounts)


        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 September 30,
2002.
<TABLE>
<CAPTION>
                                                                                                        June 30,
                                                                                              ------------------------------
                                                                                                   2003           2002
                                                                                              -------------- ---------------
                <S>                                                                                 <C>             <C>
        The Company's 41% interest in Delta's standardized measure of
           discounted future cash flows was as follows...................................         $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 12 - 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 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, IRLP sold its refinery, the Indian Refinery, to
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.

                                      -46-
<PAGE>
                            Castle Energy Corporation
                   Notes to Consolidated Financial Statements
                   ("$000's" Omitted Except Per Share Amounts)


        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's general counsel subsequently corresponded with
ChevronTexaco and the Company voluntarily provided a number of documents
requested by ChevronTexaco. In June 2002, ChevronTexaco's counsel indicated to
the Company's general counsel 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 Federal District Court has set a presumptive trial date for
this matter for December 13, 2004, but the actual trial date could be later due
to a crowded docket in the district. The Company does intend to pursue all
available opportunities for early dismissal of this matter, including requests
for summary judgement prior to trial.

                                      -47-
<PAGE>
                            Castle Energy Corporation
                   Notes to Consolidated Financial Statements
                   ("$000's" Omitted Except Per Share Amounts)


        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 and final 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.

                                      -48-
<PAGE>
                            Castle Energy Corporation
                   Notes to Consolidated Financial Statements
                   ("$000's" Omitted Except Per Share Amounts)


NOTE 13 - 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, 2003:
<TABLE>
<CAPTION>
                                                                                   Lease           Sublease
        Year Ending September 30,                                               Commitments         Rentals
        -------------------------                                               -----------        --------
               <S>                                                                   <C>               <C>
              2004.....................................................             $240               $19
              2005.....................................................               76                 3
                                                                                    ----               ---
              Total....................................................             $316               $22
                                                                                    ====               ===
</TABLE>

        Rent expense for the years ended September 30, 2003, 2002 and 2001 was
$449, $517 and $456, respectively.

        See Note 22.

        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 or 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, 2003, the Company still had a
severance agreement with the one officer who has not been severed or whose
compensation had not been reduced. Such severance obligation, if the officer is
severed, aggregated $52 at September 30, 2003.

        Line of Credit

        At September 30, 2003, a $4,075 (consisting of $3,886 principal and $189
accrued interest) letter of credit supporting a bond for the Long Trusts Lawsuit
litigation was outstanding. The letter of credit expires February 1, 2005. The
Company has secured this letter of credit with a certificate of deposit at an
energy bank. This letter of credit accrues interest at 2.25% annually. The
letter of credit was issued by the energy bank pursuant to a $40,000 line of
credit facility with that energy bank. The Company allowed that facility to
terminate except for the letter of credit after it sold all of its oil and gas
properties to Delta in May 2002 (see Note 4). There are currently no
restrictions on payment of dividends by the Company so long as the Company
secures outstanding letters of credit with its own funds as is currently the
case.

        If the Texas Supreme Court denies the Long Trusts petition for review to
that court (see below), the Company expects the bond and related letter of
credit to be released shortly thereafter.

        Legal Proceedings

            Contingent Environmental Liabilities

            See Note 12.

            Other Litigation

            Long Trusts Lawsuit

            On July 31, 2003, the 12th Court of Appeals in Tyler, Texas reversed
and remanded the trial court's judgment against the Company in this matter,
while affirming the award on the counterclaim made by one of the Company's
subsidiaries.

                                      -49-
<PAGE>
                            Castle Energy Corporation
                   Notes to Consolidated Financial Statements
                   ("$000's" Omitted Except Per Share Amounts)


            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's counterclaim 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.

            To pursue the 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 attorney's fees, and to maintain that bond until the
resolution of the appeal. Originally, the Company and its subsidiaries
anticipated posting a bond of approximately $3,000 based upon the net amount of
damages but the Company and its subsidiaries later decided to post a bond of
$3,886 based upon the gross damages in order to avoid on-going legal expenses
and to expeditiously move the case to the Tyler Court of Appeals. The
certificate of deposit, including accumulated interest, supporting the bond was
$4,075 as of September 30, 2003. The letter of credit supporting this bond was
provided by the Company's lender pursuant to the Company's line of credit with
that lender, and such letter of credit was supported by a certificate of deposit
of the Company. The certificate of deposit will remain restricted until all
appeals have been completed. Having sold all of its domestic oil and gas
properties, the Company no longer directly owns any oil and gas assets with
which to collateralize the bond.

            The Long Trusts have filed a petition for review with the Supreme
Court of Texas. The Texas Supreme Court grants only a small percentage of
petitions for review that are filed. Should the Long Trusts' petition for
retrial for review be denied and their breach of contract claims be retried, the
Company will vigorously defend against them. Based on the evidence presented at
the initial trial, the Company believes such claims, even if decided adversely
to the Company, will not result in a material loss to the Company. Because the
Long Trusts have filed a petition for review with the Supreme Court of Texas,
the Company will be required to maintain its appeal bond until 30 days following
a decision by the Supreme Court, which could be in the spring or summer of 2004
if the petition is denied or longer if the petition is granted. When all appeals
are completed and if there are no changes to the court of appeals decision by
the Supreme Court of Texas, CTPLP will be permitted to enforce its judgment
against the Long Trusts.

                                      -50-
<PAGE>
                            Castle Energy Corporation
                   Notes to Consolidated Financial Statements
                   ("$000's" Omitted Except Per Share Amounts)


            The Company has not accrued any recoveries for this litigation but
will record recoveries, if any, when realized.

            Pilgreen Litigation

            As part of the oil and gas properties acquired from 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.) 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.

            CTOGLP has also been informed that production proceeds from an
additional well on the Simpson lease in which CTOGLP has a 5.325% overriding
royalty interest have been suspended by the court 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.

            The Company's policy with respect to any amounts recovered is to
record them as income only when and if such amounts are actually received.

            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 preliminarily estimates the amount in
controversy to be approximately $1,180. Dominion threatened to suspend all
revenue payable to the Company from the Mitchell and Migl-Mitchell to offset its
claim. The Company and Dominion are currently examining 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.

            On or about July 19, 2003, Dominion filed a motion for partial
summary judgement concerning the Company's claim that it had assumed the
liabilities of its predecessor in interest. On July 28, 2003, CTOGLP filed its
response to Dominion's motion as well as its own cross motion for partial
summary judgement. In September 2003, the District Court of Lavaca County
granted Dominion's partial motion for partial summary judgement. No date has
been set for trial.

            The Company is contesting this matter vigorously and believes that
Dominion's claims are without merit and has accordingly made no provision for
Dominion's claim in its September 30, 2003 financial statements.

                                      -51-
<PAGE>
                            Castle Energy Corporation
                   Notes to Consolidated Financial Statements
                   ("$000's" Omitted Except Per Share Amounts)


            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 14 - 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, 2003, 2002 and 2001, the Company's
contributions to the Plan aggregated $18, $46, and $50, respectively.

        Post-Retirement Benefits

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

NOTE 15 - 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, 2003, 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.

         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

                                      -52-
<PAGE>
                            Castle Energy Corporation
                   Notes to Consolidated Financial Statements
                   ("$000's" Omitted Except Per Share Amounts)


         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, 2003, the Company's investment in Delta aggregated
$29,477. 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 16 - STOCK OPTIONS AND WARRANTS

         Option and warrant activities during each of the three years ended
September 30, 2003 are as follows (in whole units):
<TABLE>
<CAPTION>
                                                                                  Incentive
                                                                                    Plan          Other
                                                                                   Options       Options          Total
                                                                              --------------- ------------- ---------------
           <S>                                                                         <C>            <C>            <C>
        Outstanding at October 1, 2000....................................           630,000        60,000         690,000
        Issued............................................................            60,000                        60,000
                                                                                   ---------        ------       ---------
        Outstanding at September 30, 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
                                                                                   =========        ======       =========

        Exercisable at September 30, 2003.................................           652,500        60,000         712,500
                                                                                   =========        ======       =========

        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
                                                                                   =========        ======       =========
        Reserved at September 30, 2000....................................         1,687,500        60,000       1,747,500
                                                                                   =========        ======       =========

        Exercise prices at:

                September 30, 2003........................................          $3.42-           $3.79
                                                                                    $8.58
                September 30, 2002........................................          $3.42-           $3.79
                                                                                    $8.58
                September 30, 2001........................................          $3.42-           $3.79
                                                                                    $8.58

                Exercise Termination Dates................................     12/19/2004-       4/23/2007     12/19/2004-
                                                                                01/02/2012                      01/02/2012
</TABLE>

         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.

                                      -53-

<PAGE>
                            Castle Energy Corporation
                   Notes to Consolidated Financial Statements
                   ("$000's" Omitted Except Per Share Amounts)


        The Company applies Accounting Principles Board Opinion Number 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. The following reflect the Company's pro-forma
net income and net income per share had the Company determined compensation
costs based upon fair market values of options and warrants at the grant date
pursuant to SFAS 123 as well as the related disclosures required by SFAS 123.

        A summary of the Company's stock option and warrant activity from
October 1, 2000 through September 30, 2003 is as follows:
<TABLE>
<CAPTION>
                                                                                          Weighted
                                                                                           Average
                                                                        Options             Price
                                                                        -------           ---------
        <S>                                                               <C>                  <C>
      Outstanding - October 1, 2000...........................           690,000              $5.09
      Issued..................................................            60,000               7.00
                                                                         -------              -----
      Outstanding - September 30, 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
                                                                         =======              =====
</TABLE>

        At September 30, 2003, exercise prices for outstanding options ranged
from $3.42 to $8.58. The weighted average remaining contractual life of such
options was 4.53 years.

        The per share weighted average fair values of stock options issued
during fiscal 2002 and fiscal 2001 were $1.03 and $2.41, respectively, 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 and 3.0% in 2001; risk free interest rate - 2.64% in 2002, and 3.50% in
2001; expected life of 10 years in 2002 and 2001 and volatility factor of .40 in
2002, and .38 in 2001. No stock options were issued in fiscal 2003.

        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,
                                                                            ------------------------------------------------
                                                                                 2003             2002            2001
                                                                            --------------- ---------------- ---------------

        <S>                                                                      <C>              <C>               <C>
      Net income (loss) as reported.....................................       ($2,001)         ($1,844)          $1,716
      Adjustment required by SFAS 123...................................                            (62)            (145)
                                                                                ------          -------           ------
      Pro-forma net income (loss).......................................       ($2,001)         ($1,906)          $1,571
                                                                                ======          =======           ======
      Pro-forma net income (loss) per share:
         Basic..........................................................       ($ 0.30)         ($ 0.29)          $ 0.24
                                                                                ======          =======           ======
         Diluted........................................................       ($ 0.30)         ($ 0.29)          $ 0.23
                                                                                ======          =======           ======

</TABLE>

NOTE 17 - INCOME TAXES

         Provisions for (benefit of) income taxes consist of:
<TABLE>
<CAPTION>
                                                                                         Year Ended September 30,
                                                                              ------------------------------------------------
                                                                                   2003             2002            2001
                                                                              ---------------- --------------- ---------------
                <S>                                                                  <C>              <C>              <C>
         Provision for (benefit of) income taxes:
            Current:
              Federal....................................................                                                 $ 4
              State......................................................
            Deferred:
              Federal....................................................             ($1,809)        ($  252)            786
              State......................................................                 (52)             (8)             22
            Adjustment to the valuation allowance for deferred taxes:
              Federal....................................................               1,470           1,308            (419)
              State......................................................                  42              37             (12)
                                                                                      -------          ------            ----
                                                                                      ($  349)         $1,085            $381
                                                                                      =======          ======            ====
</TABLE>

                                      -54-

<PAGE>


                            Castle Energy Corporation
                   Notes to Consolidated Financial Statements
                   ("$000's" Omitted Except Per Share Amounts)


         Deferred tax assets (liabilities) are comprised of the following at
September 30, 2003 and 2002:
<TABLE>
<CAPTION>
                                                                                                       September 30,
                                                                                               -------------------------------
                                                                                                    2003           2002
                                                                                               --------------- ---------------

           <S>                                                                                      <C>             <C>
        Fair value of option granted to Delta Petroleum Corporation......................                          $  155
        Investment in Delta Petroleum Corporation........................................         ($   80)            489
        Operating losses and tax credit carryforwards....................................           4,384           1,969
        Statutory depletion carryovers...................................................           2,037           2,167
        Discontinued net refining operations.............................................             866             866
        Investment in Network Energy LLC.................................................             173
        Other............................................................................              51              53
                                                                                                   ------          ------
                                                                                                    7,431           5,699
        Valuation allowance..............................................................          (6,416)         (4,904)
                                                                                                   ------          ------
                                                                                                   $1,015          $  795
                                                                                                   ======          ======

        Deferred tax assets - current....................................................          $  649          $  429
        Deferred tax assets - long-term..................................................             366             366
                                                                                                   ------          ------
                                                                                                   $1,015          $  795
                                                                                                   ======          ======
</TABLE>
         At September 30, 2003, the Company increased its valuation allowance by
$1,512 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 no future taxable
income. The net deferred tax asset at September 30, 2003 relates to income that
has been recognized for tax purposes and has not been recognized for financial
reporting purposes.

         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,
                                                                                    ------------------------------------------
                                                                                         2003           2002          2001
                                                                                    ------------- -------------- -------------
          <S>                                                                              <C>            <C>              <C>
       Tax (benefit) at statutory rate.......................................            ($ 823)        ($  265)         $734
       State taxes, net of federal benefit...................................               (15)             (8)            7
       Revision of tax estimates related to oil and gas tax credits..........              (427)
       Revision of tax estimates related to statutory depletion..............              (130)
       Revision of tax estimates - other.....................................              (466)                           50
       Increase (decrease) in valuation allowance............................             1,512           1,345          (431)
       Other.................................................................                                13            21
                                                                                         ------          ------          ----
                                                                                         ($ 349)         $1,085          $381
                                                                                         ======          ======          ====
</TABLE>

         At September 30, 2003, the Company had the following tax carryforwards
available:
<TABLE>
<CAPTION>
                                                                                                    Federal Tax
                                                                                    ------------------------------------------
                                                                                                           Alternative
                                                                                                             Minimum
                                                                                        Regular                Tax
                                                                                    ------------------ -----------------------
      <S>                                                                                 <C>                    <C>
      Net operating loss.....................................................            $3,369                 $19,378
      Alternative minimum tax credits........................................            $3,171                     N/A
      Statutory depletion....................................................            $5,397                      --
</TABLE>

                                      -55-

<PAGE>
                            Castle Energy Corporation
                   Notes to Consolidated Financial Statements
                   ("$000's" Omitted Except Per Share Amounts)


         The net operating loss carryforwards expire from 2004 through 2010.

         The Company also estimates that it has approximately $53,000 in
individual state tax loss carryforwards available at September 30, 2003. All 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 18 - 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, 2003 and 2002, Delta paid two
officers of the Company $420 and $105, respectively, for consulting
compensation. 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%.

NOTE 19 - 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. 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. 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.

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

                                      -56-
<PAGE>
                            Castle Energy Corporation
                   Notes to Consolidated Financial Statements
                   ("$000's" Omitted Except Per 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                                    ($ 2,696)       ($ 2,020)
Identifiable assets.........           $66,973 *        $82,832                                    ($97,864)        $51,941
Investment in equity method
   investees................                            $26,886                                     $   375         $27,261
Capital expenditures........                            $   816                                                     $   816
Depreciation, depletion and
   amortization.............                            $ 3,149                                     $     2         $ 3,151
</TABLE>
<TABLE>
<CAPTION>
                                                              Year Ended September 30, 2001
                                 ---------------------------------------------------------------------------------------------
                                 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...................                            $ 21,144                                                      $21,144
Equity in net (loss) of equity
  method investees.........                                                            ($99)                        ($    99)
Operating income (loss)....                            $  5,682                                   ($  4,169)         $ 1,513
Identifiable assets........            $67,702*        $105,238                                   ($113,822)         $59,118
Investment in equity method
  investees................                                                                        $    401          $   401
Capital expenditures.......                            $ 15,531                                                      $15,531
Depreciation, depletion and
  amortization.............                            $  3,468                                    $      2          $ 3,470
</TABLE>

     * Consists primarily of intracompany 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.

NOTE 20 - 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
Penn Octane and ChevronTexaco common stock and options to buy Penn Octane stock
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. Fair market value for options is computed using the Black - Scholes
option valuation model.

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

                                      -57-
<PAGE>
                            Castle Energy Corporation
                   Notes to Consolidated Financial Statements
                   ("$000's" Omitted Except Per Share Amounts)



NOTE 21 - 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, 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>

<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, 2002:
        Revenues...............................                $3,441           $3,258          $2,525              $  221
        Operating income (loss)................               ($  426)         ($  500)          $ 359             ($1,453)
        Net income (loss)......................               ($  327)         ($  529)          $ 632             ($1,620)
        Net income (loss) per share (diluted)..               ($  .05)         ($  .08)          $ .09             ($  .24)
</TABLE>


        The quarterly financial information for the 2002 quarters differs from
that filed on Forms 10-Q by the Company for these periods because the above
quarterly financial information retroactively includes the Company's share of
Delta's losses for these periods on the equity method and a reclassification
whereas the corresponding Forms 10-Q do not.

NOTE 22 - SUBSEQUENT EVENTS

        In October 2003, the Company entered into an office lease for five years
at an annual fixed rental of approximately $54 plus allocated operating and
utility costs. The lease includes a termination option after three years. The
lease for the Company's current office building expired on November 30, 2003.





                                      -58-
<PAGE>



                          Independent Auditors' Report


The Board of Directors
Castle Energy Corporation:

We have audited the accompanying consolidated balance sheets of Castle Energy
Corporation and subsidiaries as of September 30, 2003 and 2002, 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, 2003. 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 auditing standards generally accepted
in the United States of America. 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, 2003 and 2002, and the results
of their operations and their cash flows for each of the years in the three year
period ended September 30, 2003 in conformity with accounting principles
generally accepted in the United States of America.

                                                       KPMG LLP

Houston, Texas
December 12, 2003





                                      -59-
<PAGE>


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




                                      None
























                                      -60-
<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. 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,
2003 are as follows:

        a) They have concluded that the Company's disclosure controls and
           procedures are effective in promptly identifying items that should be
           included in our reports required under the Exchange Act except as
           indicated below.

        b) There have not been any significant changes in our internal controls
           or in other factors that could affect such controls subsequent to
           September 30, 2003 except as indicated below.

        The Company was required to restate its September 30, 2002 financial
statements because of a charge to general and administrative expenses that
should have been recorded as a reduction to accrued expenses. As a result of
this restatement, the Company instituted an additional internal control
procedure whereby the Company's Chief Financial Officer will review all
quarterly closing journal entries in excess of $25,000. The Company's management
believes that this new procedure will preclude future restatements arising from
charges to incorrect account(s).

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

ITEM 15. PRINCIPAL ACCOUNTANTS FEES AND SERVICES

        Fees billed to the Company by the Company's independent accountants,
KPMG LLP, were as follows:
<TABLE>
<CAPTION>
                                                                                   Year Ended September 30,
                                                                                    ----------------------
                                                                                     2003           2002
                                                                                    -------       --------
         <S>                                                                        <C>           <C>
         Audit fees.............................................................    $96,000       $111,500
         Audit - related fees...................................................
         Tax fees...............................................................                     7,285
         All other fees.........................................................    -------       --------
                                                                                    $96,000       $118,785
                                                                                    =======       ========
</TABLE>
       The policy of the Audit Committee of the Company is to pre-approve all
professional services performed by the Company's independent accountants. The
Audit Committee pre-approved all such professional services for the year ended
September 30, 2003.

______________
**     The information required by Items 10, 11 and 12 is incorporated by
       reference to the Registrant's Proxy Statement for its 2004 Annual Meeting
       of Stockholders.













                                      -61-
<PAGE>


                                     PART IV


ITEM 16.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

   (a) 1. and 2. 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.

   3.   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)

          10.141         Second Amendment - Promissary Note of Penn Octane Corporation (29)

          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)

          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, 2003 (34)

          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>



                                      -62-
<PAGE>


   (b) Reports on Form 8-K

          The Company filed no reports on Form 8-K during the last quarter of
the Company's fiscal year ended September 30, 2003.

------------------
(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)
(29)      Incorporated by reference to the Registrant's Form 10-Q for quarter
          ended December 31, 2000 (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)










                                      -63-
<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:   January 2, 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
in the capacities and on the dates indicated.
<TABLE>
<S>                                             <C>                                                 <C>
/s/JOSEPH L. CASTLE II                          Chairman of the Board and Chief                     January 2, 2004
-----------------------                         Executive Officer
   Joseph L. Castle II                          Director


/s/MARTIN R. HOFFMANN                           Director                                            January 2, 2004
-----------------------
   Martin R. Hoffmann



/s/JOHN P. KELLER                               Director                                            January 2, 2004
-----------------------
   John P. Keller

/S/RUSSELL S. LEWIS                             Director                                            January 2, 2004
-----------------------
   Russell S. Lewis


/s/RICHARD E. STAEDTLER                         Senior Vice President                               January 2, 2004
-----------------------                         Chief Financial Officer
   Richard E. Staedtler                         Chief Accounting Officer
                                                Director

/s/SIDNEY F. WENTZ                              Director                                            January 2, 2004
-----------------------
   Sidney F. Wentz
</TABLE>





                                      -64-
<PAGE>

<TABLE>
<CAPTION>
                                     DIRECTORS, OFFICERS, BOARD OF DIRECTORS AND
                                                    PROFESSIONALS
                                                  (January 2, 2004)
<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>