<PAGE>



                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549



                                    FORM 10-Q

(Mark One)

/ X /  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
       EXCHANGE ACT OF 1934

For the quarterly period ended        March 31, 2000
                               -------------------------

                                       or


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

For the transition period ended

                         Commission file number: 0-10990
                                              -----------


                            CASTLE ENERGY CORPORATION
     ----------------------------------------------------------------------
             (Exact Name of Registrant as Specified in its Charter)
<TABLE>
<CAPTION>


<S>                                                                                        <C>
                         Delaware                                                          76-0035225
-------------------------------------------------------------------------------------------------------------------
(State or Other Jurisdiction of Incorporation or Organization)                 (I.R.S. Employer Identification No.)


              One Radnor Corporate Center, Suite 250, 100 Matsonford Road, Radnor, Pennsylvania 19087
-----------------------------------------------------------------------------------------------------
(Address of Principal Executive Offices)                                                     (Zip Code)

</TABLE>

Registrant's Telephone Number, Including Area Code           (610) 995-9400
                                                            ---------------


              (Former Name, Former Address and Former Fiscal Year,
                          if Changed Since Last Report)

         Indicate by check X 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 the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date: 6,817,886 shares of
Common Stock, $.50 par value outstanding as of May 5, 2000.



<PAGE>





                            CASTLE ENERGY CORPORATION


                                      INDEX
<TABLE>
<CAPTION>

                                                                                                    Page #


Part I.      Financial Information

<S>                                                                                                  <C>

             Item 1.      Financial Statements:

                          Consolidated Balance Sheets - March 31, 2000 (Unaudited)
                          and September 30, 1999.................................................      1

                          Consolidated Statements of Operations - Three Months
                          Ended March 31, 2000 and 1999 (Unaudited)..............................      2

                          Consolidated Statements of Operations - Six Months Ended
                          March 31, 2000 and 1999 (Unaudited)....................................      3

                          Consolidated Statements of Cash Flows - Six Months Ended
                          March 31, 2000 and 1999 (Unaudited)....................................      4

                          Consolidated Statements of Stockholders' Equity and Other
                          Comprehensive Income - Year Ended September 30, 1999
                          and Six Months Ended March 31, 2000 (Unaudited)........................      5

                          Notes to the Consolidated Financial Statements (Unaudited).............      6

             Item 2. Management's Discussion and Analysis of Financial
             Condition and Results of Operations.................................................     12

             Item 3. Qualitative and Quantitative Disclosures About Market Risk..................     21

Part II.     Other Information

             Item 1.      Legal Proceedings......................................................     22

             Item 6.      Exhibits and Reports on Form 8-K.......................................     22

Signature    ....................................................................................     23

</TABLE>







<PAGE>





PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements



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

<TABLE>
<CAPTION>
                                                                                   March 31,     September 30,
                                                                                     2000            1999
                                                                                   ---------     -------------
                                     ASSETS                                          (Unaudited)
Current assets:
<S>                                                                                <C>                <C>
    Cash and cash equivalents ..................................................   $  11,281          $  22,252
    Restricted cash ............................................................       2,091                770
    Accounts receivable ........................................................       3,911              5,172
    Marketable securities ......................................................      10,077              4,194
    Prepaid expenses and other current assets ..................................         379                594
    Note receivable - Penn Octane Corporation ..................................         500
    Estimated realizable value of discontinued net refining assets .............         800                800
                                                                                   ---------          ---------
      Total current assets .....................................................      29,039             33,782
Property, plant and equipment, net:
    Natural gas transmission ...................................................          57                 60
    Furniture, fixtures and equipment ..........................................         226                298
    Oil and gas properties, net (full cost method):
            Proved properties ..................................................      28,488             24,765
            Unproved properties not being amortized ............................       3,562              1,862
Other assets ...................................................................                             29
                                                                                   ---------          ---------
      Total assets .............................................................   $  61,372          $  60,796
                                                                                   =========          =========

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
    Dividend payable ...........................................................   $     350          $     368
    Accounts payable ...........................................................       2,442              2,918
    Accrued expenses ...........................................................         371                802
      Net refining liabilities retained ........................................       3,205              3,205
                                                                                   ---------          ---------
      Total current liabilities ................................................       6,368              7,293
                                                                                   ---------          ---------
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 issued at March 31, 2000 and September 30, 1999 ...............       5,752              5,752
    Additional paid-in capital .................................................      67,365             67,365
    Accumulated other comprehensive income - unrealized gains on
      marketable securities, net of taxes ......................................       8,160              2,396
    Retained earnings ..........................................................      38,004             38,716
                                                                                   ---------          ---------
                                                                                     119,281            114,229
    Treasury stock at cost - 4,491,017 shares at March 31, 2000 and
        4,282,217 shares at September 30, 1999 .................................     (64,277)           (60,726)
                                                                                   ---------          ---------
      Total stockholders' equity ...............................................      55,004             53,503
                                                                                   ---------          ---------
      Total liabilities and stockholders' equity ...............................   $  61,372          $  60,796
                                                                                   =========          =========
</TABLE>

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

                                       -1-

<PAGE>

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


<TABLE>
<CAPTION>
                                                                        Three Months Ended March 31,
                                                                             2000            1999
                                                                         -----------    -----------
<S>                                                                      <C>            <C>
Revenues:
    Natural gas marketing and transmission:
      Gas sales ......................................................                  $    21,697
                                                                                        -----------
                                                                                             21,697
                                                                                        -----------
    Exploration and production:
      Oil and gas sales ..............................................   $     3,318            581
      Well operations ................................................           185             87
                                                                         -----------    -----------
                                                                               3,503            668
                                                                         -----------    -----------
                                                                               3,503         22,365
                                                                         -----------    -----------
Expenses:
    Natural gas marketing and transmission:
      Gas purchases ..................................................                       13,318
      Transportation .................................................                          494
      General and administrative .....................................                           67
      Depreciation and amortization ..................................                        2,365
                                                                                        -----------
                                                                                             16,244
                                                                                        -----------
    Exploration and production:
      Oil and gas production .........................................         1,636            287
      General and administrative .....................................           361            149
      Depreciation, depletion and amortization .......................           941             82
                                                                         -----------    -----------
                                                                               2,938            518
                                                                         -----------    -----------
    Corporate general and administrative expenses ....................           952            778
                                                                         -----------    -----------
                                                                               3,890         17,540
                                                                         -----------    -----------
Operating income (loss) ..............................................          (387)         4,825
                                                                         -----------    -----------

Other income:
        Interest income ..............................................           195            478
        Other income (loss) ..........................................           (90)            33
                                                                         -----------    -----------
                                                                                 105            511
                                                                         -----------    -----------
Net income (loss) before provision for income taxes ..................          (282)         5,336
                                                                         -----------    -----------
Provision for (recovery of) income taxes:
        State ........................................................                           39
        Federal ......................................................            (5)         1,359
                                                                         -----------    -----------
                                                                                  (5)         1,398
                                                                         -----------    -----------
Net income (loss) ....................................................   ($      277)   $     3,938
                                                                         ===========    ===========

Net income (loss) per share:
        Basic ........................................................   ($      .04)   $       .46
                                                                         ===========    ===========
        Diluted ......................................................   ($      .04)   $       .46
                                                                         ===========    ===========

Weighted average number of common and potential dilutive common shares
        outstanding:
       Basic .........................................................     7,012,887      8,484,699
                                                                         ===========    ===========
       Diluted .......................................................     7,012,887      8,615,901
                                                                         ===========    ===========

</TABLE>

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

                                       -2-

<PAGE>
                            CASTLE ENERGY CORPORATION
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                     ("000's" Omitted Except Share Amounts)
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                       Six Months Ended March 31,
                                                                           2000            1999
                                                                        -----------    ------------
<S>                                                                     <C>             <C>
Revenues:
    Natural gas marketing and transmission:
      Gas sales .....................................................                  $    42,152
                                                                                       -----------
                                                                                            42,152
                                                                                       -----------
    Exploration and production:
      Oil and gas sales .............................................   $     7,403            972
      Well operations ...............................................           359            177
                                                                        -----------    -----------
                                                                              7,762          1,149
                                                                        -----------    -----------
                                                                              7,762         43,301
                                                                        -----------    -----------
Expenses:
    Natural gas marketing and transmission:
      Gas purchases .................................................                       26,264
      Transportation ................................................                          953
      General and administrative ....................................                          156
      Depreciation and amortization .................................                        4,731
                                                                                       -----------
                                                                                            32,104
                                                                                       -----------

    Exploration and production:
      Oil and gas production ........................................         3,185            481
      General and administrative ....................................           859            396
      Depreciation, depletion and amortization ......................         2,213            149
                                                                        -----------    -----------
                                                                              6,257          1,026
                                                                        -----------    -----------
    Corporate general and administrative expenses ...................         1,860          1,891
                                                                        -----------    -----------
                                                                              8,117         35,021
                                                                        -----------    -----------
Operating income (loss) .............................................          (355)         8,280
                                                                        -----------    -----------

Other income:
        Interest income .............................................           394            945
        Other income (loss) .........................................           (57)            34
                                                                        -----------    -----------
                                                                                337            979
                                                                        -----------    -----------
Net income (loss) before provision for income taxes .................           (18)         9,259
                                                                        -----------    -----------
Provision for (recovery of) income taxes:
        State .......................................................                           78
        Federal .....................................................                        2,732
                                                                        -----------    -----------
                                                                                             2,810
                                                                                       -----------
Net income (loss) ...................................................   ($       18)   $     6,449
                                                                        ===========    ===========

Net income (loss) per share:
        Basic .......................................................   ($      .00)   $       .75
                                                                        ===========    ===========
        Diluted .....................................................   ($      .00)   $       .73
                                                                        ===========    ===========

Weightedaverage number of common and potential dilutive common shares
        outstanding:
        Basic .......................................................     7,070,433      8,654,763
                                                                        ===========    ===========
        Diluted .....................................................     7,070,433      8,808,372
                                                                        ===========    ===========
</TABLE>
   The accompanying notes are an integral part of these financial statements.

                                       -3-

<PAGE>




                            CASTLE ENERGY CORPORATION
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                ("000's" Omitted)
                                   (Unaudited)


<TABLE>
<CAPTION>

                                                                 Six Months Ended March 31,
                                                                   2000             1999
                                                                 --------         --------

<S>                                                              <C>              <C>
Net cash flow provided by operating activities ...............   $  1,359         $ 13,994
                                                                 --------         --------

Cash flows from investing activities:
       Investment in pipelines ...............................                         (15)
       Investment in furniture, fixtures and equipment .......        (45)
       Investment in oil and gas properties ..................     (7,516)            (301)
       Investment in note receivable - Penn Octane Corporation       (500)
                                                                 --------         --------
                 Net cash (used in) investing activities .....     (8,061)            (316)
                                                                 --------         --------

Cash flows from financing activities:
         Dividends paid to stockholders ......................       (718)            (881)
         Acquisition of treasury stock .......................     (3,551)          (5,552)
                                                                 --------         --------
                 Net cash (used in) financing activities .....     (4,269)          (6,433)
                                                                 --------         --------
Net increase (decrease) in cash and cash equivalents .........    (10,971)           7,245
Cash and cash equivalents - beginning of period ..............     22,252           36,600
                                                                 --------         --------
Cash and cash equivalents - end of period ....................   $ 11,281         $ 43,845
                                                                 ========         ========
</TABLE>


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

                                       -4-

<PAGE>


                            CASTLE ENERGY CORPORATION
               CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND
                           OTHER COMPREHENSIVE INCOME
                     ("000's" Omitted Except Share Amounts)

<TABLE>
<CAPTION>

                                                  Year Ended September 30, 1999 And Six Months Ended March 31,  2000
                                          -----------------------------------------------------------------------------------
                                                                                                   Accumulated
                                              Common Stock         Additional                         Other
                                          -------------------        Paid-In      Comprehensive  Comprehensive    Retained
                                          Shares       Amount        Capital         Income          Income       Earnings
                                          ------       ------     ------------- ---------------- --------------  ---------

<S>               <C>                     <C>             <C>           <C>      <C>             <C>             <C>
Balance - October 1, 1998............     6,803,646       $3,402        $67,122                                      $34,836
Stock acquired.......................
Options exercised....................        25,000           12            243
Dividends declared ($.25 per share)..                                                                                 (2,048)
Stock split retroactively applied....     4,675,258        2,338                                                      (2,338)
Comprehensive income.................
  Net income.........................                                                   $  8,266                       8,266
  Other comprehensive income:
     Unrealized gain on marketable
       securities, net of tax........                                                      2,396         $2,396
                                                                                       ---------
                                         ----------        -----         ------          $10,662         -----        ------
Balance - September 30, 1999.........    11,503,904        5,752         67,365        =========          2,396       38,716
Stock acquired.......................
Dividends declared ($.05/share)......                                                                                   (694)
Comprehensive income.................
  Net income (loss)..................                                                   ($    18)                        (18)
  Other comprehensive income:
     Unrealized gain on marketable
       securities, net of tax........                                                      5,764          5,764
                                                                                         -------
                                         ----------       ------        -------           $5,746         ------      -------
Balance - March 31, 2000.............    11,503,904       $5,752        $67,365           ======         $8,160      $38,004
                                         ==========       ======        =======                          ======      =======

</TABLE>

<TABLE>
<CAPTION>

                                           Year Ended September 30, 1999 And Six Months Ended March 31,  2000
                                          -------------------------------------------------------------------

                                             Treasury Stock
                                           --------------------
                                           Shares       Amount        Total
                                           ------       ------    ---------

<S>               <C>                     <C>           <C>       <C>
Balance - October 1, 1998............      3,862,917     ($53,807)   $51,553
Stock acquired.......................        419,300       (6,919)    (6,919)
Options exercised....................                                    255
Dividends declared ($.25 per share)..                                 (2,048)
Stock split retroactively applied....
Comprehensive income.................
  Net income.........................                                  8,266
  Other comprehensive income:
     Unrealized gain on marketable
       securities, net of tax........                                  2,396

                                           ---------      -------     ------
Balance - September 30, 1999.........      4,282,217      (60,726)    53,503
Stock acquired.......................        208,800       (3,551)    (3,551)
Dividends declared ($.05/share)......                                   (694)
Comprehensive income.................
  Net income (loss)..................                                    (18)
  Other comprehensive income:
     Unrealized gain on marketable
       securities, net of tax........                                  5,764

                                           ---------      -------     ------
Balance - March 31, 2000.............      4,491,017     ($64,277)   $55,004
                                           =========      =======    =======
</TABLE>

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

                                       -5-

<PAGE>


                   Castle Energy Corporation and Subsidiaries
                   Notes to Consolidated Financial Statements
                  (Dollars in thousands, except share amounts)
                                   (Unaudited)




Note 1 - Basis of Preparation

         The unaudited consolidated financial statements of Castle Energy
Corporation (the "Company") included herein have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
reclassifications have been made to make the periods presented comparable.
Although certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, the Company believes that the disclosures included herein are
adequate to make the information presented not misleading. Operating results for
the three-month and six-month periods ended March 31, 2000 are not necessarily
indicative of the results that may be expected for the fiscal year ending
September 30, 2000 or subsequent periods. These unaudited consolidated financial
statements should be read in conjunction with the financial statements and the
notes thereto included in the Company's Annual Report on Form 10-K for the
fiscal year ended September 30, 1999.

         In the opinion of the Company, the unaudited consolidated financial
statements contain all adjustments necessary for a fair statement of the results
of operations for the three-month and six month periods ended March 31, 2000 and
1999 and for a fair statement of financial position at March 31, 2000.

Note 2 - September 30, 1999 Balance Sheet

         The amounts presented in the balance sheet as of September 30, 1999
were derived from the Company's audited consolidated financial statements which
were included in its Annual Report on Form 10-K for the fiscal year ended
September 30, 1999.

Note 3 - Discontinued Operations

         From August 1989 to September 30, 1995, several of the Company's
subsidiaries conducted refining operations. By December 12, 1995, the Company's
refining subsidiaries had sold all of their refining assets and the purchasers
had assumed all related liabilities, including contingent environmental
liabilities. In addition, in 1996, Powerine Oil Company ("Powerine"), one of the
Company's former refining subsidiaries, merged into a subsidiary of the
purchaser and is no longer a subsidiary of the Company. The Company's remaining
refining subsidiaries own no refining assets, have been inactive for almost five
years, and are in the process of liquidation. As a result, the Company has
accounted for its refining operations as discontinued operations. Such
discontinued refining operations have not impacted the Company's operations
since September 30, 1995 although they may impact the Company's future
operations.



                                       -6-

<PAGE>


                   Castle Energy Corporation and Subsidiaries
                   Notes to Consolidated Financial Statements
                  (Dollars in thousands, except share amounts)
                                   (Unaudited)



Note 4 - Contingencies/Litigation

        Contingent Environmental Liabilities - Refining

        Until September 30, 1995, the Company, through its subsidiaries,
operated in the refining segment of the petroleum business. As operators of
refineries, certain of the Company's subsidiaries were potentially liable for
environmental costs related to air emissions, ground and water contamination,
hazardous waste disposal and third party claims related to the foregoing.
Between September 29, 1995 and December 12, 1995 both of the refineries owned by
the Company's refining subsidiaries were sold to outside parties. In each case
the purchaser assumed all environmental liabilities. Furthermore, on January 16,
1996, Powerine, the subsidiary that previously owned a refinery in Santa Fe
Springs, California ("Powerine Refinery"), was effectively acquired by Energy
Merchant Corp. ("EMC"), an unrelated party.

        In July of 1996, the Company was named a defendant in a class action
lawsuit concerning emissions from the Powerine Refinery. In April of 1997, the
court granted the Company's motion to quash the plaintiff's complaint based upon
lack of jurisdiction and the Company is no longer involved in the case.

        During fiscal 1998, the Company was informed that the United States
Environmental Protection Agency ("EPA") was investigating offsite acid sludge
waste found near the Indian Refinery and was also investigating and remediating
surface contamination in the Indian Refinery property. The Indian Refinery,
located in Lawrenceville, Illinois, was previously operated by Indian Refinery I
Limited Partnership ("IRLP"), a subsidiary of the Company inactive since
September 30, 1995. Neither the Company nor IRLP was named with respect to these
specific matters.

        In October 1998, the EPA named the Company and two of its subsidiaries,
including IRLP, as potentially responsible parties for the expected overall
clean-up of the Indian Refinery. In addition, eighteen other parties were named
including Texaco Refining and Marketing, Inc., the refinery operator for
approximately 50 years. The Company subsequently responded to the EPA indicating
that it was neither the owner nor operator of the Indian Refinery and thus not
responsible for its remediation.

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

        As of May 5, 2000, neither of the refineries had restarted. The Powerine
Refinery has been sold to an unrelated party, which, the Company has been
informed, is seeking financing to restart that refinery. The purchaser of the
Indian Refinery, American Western Refining Limited Partnership ("American
Western"), defaulted on its $5 million note to IRLP, filed a voluntary petition
for

                                       -7-

<PAGE>


                   Castle Energy Corporation and Subsidiaries
                   Notes to Consolidated Financial Statements
                  (Dollars in thousands, except share amounts)
                                   (Unaudited)


bankruptcy in the United States Bankruptcy Court in the District of Delaware
under Chapter 11 of the United States Bankruptcy Code and later sold the Indian
Refinery to another unrelated party. The new owner is in the process of
dismantling much of the Indian Refinery. Estimated undiscounted clean-up costs
for the Indian Refinery are $80,000 to $150,000 according to third parties.

        Although the environmental liabilities related to the Indian Refinery
and the Powerine 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, purchaser of the Indian Refinery, filed for bankruptcy and is
in the process of liquidation. The current owner of the Indian Refinery is
dismantling it. The current owner of the Powerine Refinery is reported to be
continuing to seek financing to restart that refinery. Furthermore, as noted
above, the Company and two of its subsidiaries have been named by the EPA as
potentially responsible parties for the remediation of the Indian Refinery.

        An opinion issued by the U.S. Supreme Court in June 1998 in a comparable
matter supports the Company's position. Nevertheless, if funds for environmental
clean-up are not provided by former and/or present owners of the refineries, it
is possible that the Company and/or one or more of its former refining
subsidiaries 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. Whether or not the Company
ultimately prevails in such a circumstance, should litigation involving the
Company or any of its former or current refining subsidiaries occur, the Company
would probably incur substantial legal fees and experience a diversion of
management resources from other operations.

        Litigation

        Larry Long Litigation

        Larry Long, the original plaintiff who filed suit against the Company on
his own behalf and for others similarly situated, seeking royalties on certain
operating fees paid to one of the Company's subsidiaries, has withdrawn from
that litigation and is no longer a plaintiff in the case. The remaining
purported class representative, Travis Crim, continues, however, to pursue the
claim.

        The Company's motion for summary judgement in this case was denied in
April 2000.



                                       -8-

<PAGE>


                   Castle Energy Corporation and Subsidiaries
                   Notes to Consolidated Financial Statements
                  (Dollars in thousands, except share amounts)
                                   (Unaudited)



        Rex Nichols et al Lawsuit

        In April 2000, the Company agreed to settle this lawsuit for $120. The
Company expects to pay the settlement amount to the plaintiffs in May 2000.

        There have been no material litigation developments since those reported
in Item 3 of the Company's Form 10-K for the year ended September 30, 1999
except as indicated above.

Note 5 - New Accounting Pronouncements

         Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities ("SFAS 133"), was issued by the
Financial Accounting Standards Board in June 1998. 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 accounting for changes in the fair value (i.e., gains or losses) of a
derivative instrument depends on whether such instrument has been designated and
qualifies as part of a hedging relationship and, if so, on the reason for
holding it. If certain conditions are met, entities may elect to designate a
derivative instrument as a hedge of exposures to changes in fair values, cash
flows, or foreign currencies. If the hedged exposure is a fair value exposure,
the gain or loss on the derivative instrument is recognized in earnings in the
period of change together with the offsetting loss or gain on the hedged item
attributable to the risk being hedged. If the hedged exposure is a cash flow
exposure, the effective portion of the gain or loss on the derivative instrument
is reported initially as a component of other comprehensive income (not included
in earnings) and subsequently reclassified into earnings when the forecasted
transaction affects earnings. Any amounts excluded from the assessment of hedge
effectiveness, as well as the ineffective portion of the gain or loss, is
reported in earnings immediately. Accounting for foreign currency hedges is
similar to the accounting for fair value and cash flow hedges. If the derivative
instrument is not designated as a hedge, the gain or loss is recognized in
earnings in the period of change. SFAS 133 is effective for all fiscal quarters
of fiscal years beginning after June 15, 2000. The Company anticipates that it
will adopt SFAS 133 effective October 1, 2000. The Company has not yet
determined the impact of SFAS 133 on its financial condition or results of
operations.

         All hedging by the Company through June 30, 1999 was applicable to the
Company's gas marketing operations. Hedging transactions applicable to gas
marketing operations terminated on May 31, 1999 when all of the Company's
long-term gas contracts terminated. The Company, however, acquired substantial
oil and gas reserves from AmBrit Energy Corp. ("AmBrit") in June 1999 and began
hedging its crude oil and natural gas production (see Note #6).





                                       -9-

<PAGE>


                   Castle Energy Corporation and Subsidiaries
                   Notes to Consolidated Financial Statements
                  (Dollars in thousands, except share amounts)
                                   (Unaudited)


         The Company will continue to account for its current crude oil and any
future crude oil or natural gas hedges pursuant to Statement of Financial
Accounting Standards No. 80, Accounting for Futures Contracts ("SFAS 80") until
SFAS 133 becomes effective for the Company.

Note 6 - Derivative Financial Instruments

         Until May 31, 1999, the Company's natural gas marketing subsidiaries
utilized futures contracts and natural gas basis swaps to reduce their exposure
to changes in the market price of natural gas. Effective May 31, 1999, all
natural gas marketing contracts terminated. As a result of these hedging
transactions, the cost of gas purchases increased $721 and $577 for the six
month and three month periods ending March 31, 1999, respectively.

         On June 1, 1999, the Company acquired all of the oil and gas assets of
AmBrit. In July 1999, the Company hedged approximately 69% of its anticipated
consolidated crude oil production at the time (approximately 22,000 barrels per
month) and approximately 50% of its anticipated consolidated natural gas
production (approximately 300,000 mcf per month) for the period from September
1, 1999 to July 31, 2000. The Company used futures contracts to hedge such
production. The average hedged prices for crude oil and natural gas, which are
based upon futures prices on the New York Mercantile Exchange, were $20.02 per
barrel of crude oil and $2.64 per mcf of gas. For the six month and three month
periods ended March 31, 2000, oil and gas sales decreased $984 and $653,
respectively, as a result of such hedging activities.

Note 7 - Information Concerning Reportable Segments

         During the six month period ended March 31, 1999, the Company operated
in two segments of the energy industry: oil and gas exploration and production
and natural gas marketing. During the six months ended March 31, 2000, the
Company operated in only one segment of the energy industry - oil and gas
exploration and production. The Company does not allocate interest income,
interest expense or income tax expense between these segments. The operating
income achieved by each of the Company's segments was as follows:

         Six months ended March 31, 2000:
<TABLE>
<CAPTION>

                                                                                                   Operating
                      Segment                           Revenues            Expenses                Income
                      -------                           --------            --------               ---------
<S>                                                    <C>                 <C>                     <C>

1.    Oil and gas exploration and
         production                                     $  7,762           ($  6,257)               $  1,505
                                                        ========            ========                ========
</TABLE>


                                      -10-

<PAGE>


                   Castle Energy Corporation and Subsidiaries
                   Notes to Consolidated Financial Statements
                  (Dollars in thousands, except share amounts)
                                   (Unaudited)


         Six months ended March 31, 1999:

<TABLE>
<CAPTION>

                                                                                                   Operating
                      Segment                           Revenues            Expenses                Income
                      -------                           --------            --------               ---------
<S>                                                    <C>                 <C>                     <C>

1.    Oil and gas exploration and
         production                                     $  1,149            ($  1,026)               $     123
2.    Natural gas marketing                               42,152              (32,104)                  10,048
                                                        --------              -------                 --------
                                                         $43,301             ($33,130)                 $10,171
                                                         =======              =======                  =======
</TABLE>

         Three months ended March 31, 2000:

<TABLE>
<CAPTION>

                                                                                                   Operating
                      Segment                           Revenues            Expenses                Income
                      -------                           --------            --------               ---------
<S>                                                    <C>                 <C>                     <C>

1.    Oil and gas exploration and
         production                                     $  3,503              ($2,938)                $    565
                                                        ========               ======                 ========
</TABLE>


         Three months ended March 31, 1999:

<TABLE>
<CAPTION>

                                                                                                   Operating
                      Segment                           Revenues            Expenses                Income
                      -------                           --------            --------               ---------
<S>                                                    <C>                 <C>                     <C>
1.    Oil and gas exploration and
         production                                    $     668            ($    518)                $    150
2.    Natural gas marketing                               21,697              (16,244)                   5,453
                                                        --------              -------                  -------
                                                         $22,365             ($16,762)                  $5,603
                                                         =======              =======                   ======
</TABLE>

         Total assets applicable to each of the Company's two operating segments
were as follows:


                                                 March 31,      September 30,
                                                   2000             1999
                                                 --------       ------------

Oil and gas exploration and production........    $85,201         $ 79,076
Natural gas marketing.........................     67,727           67,720
Corporate and intercompany adjustments........    (91,556)         (86,000)
                                                 --------         --------
                                                  $61,372         $ 60,796
                                                  =======         ========

Note 8 - Stock Split

         On December 29, 1999, the Company's Board of Directors declared a stock
split in the form of a 200% stock dividend applicable to all stockholders of
record on January 12, 2000. The additional shares were paid on January 31, 2000
and the Company's shares first traded at post split prices on February 1, 2000.
The stock split applied only to the Company's outstanding shares on January 12,
2000 (2,337,629 shares) and did not apply to treasury shares (4,491,017 shares).
                                      -11-

<PAGE>


                            Castle Energy Corporation
                   Notes to Consolidated Financial Statements
                  (Dollars in thousands, except share amounts)
                                   (Unaudited)

As a result of the stock split 4,675,258 additional shares were issued and the
Company's common stock book value was increased $2,338 to reflect additional par
value applicable to the additional shares issued to effect the stock split. All
share changes, including those affecting the recorded book value of common
stock, have been recorded retroactively.

Note 9 - Subsequent Events

         Subsequent to March 31, 2000, the Company repurchased 195,000 shares of
its common stock for $980.


Item 2. Management's Discussion and Analysis of Financial Condition and Results
        of Operations.

RESULTS OF OPERATIONS

         As noted previously, the Company had discontinued its refining
operations by September 30, 1995. During the six month period ended March 31,
1999, the Company was engaged in natural gas marketing and oil and gas
exploration and production. During this period revenues from natural gas
marketing operations aggregated $42,152 while those from the Company's
exploration and production operations aggregated only $1,149. On May 31, 1999,
the Company's natural gas marketing operations ended because of the expiration
of the Company's subsidiaries' natural gas marketing gas contracts. On June 1,
1999, however, the Company acquired all of the oil and gas assets of AmBrit. The
production associated with AmBrit's oil and gas properties approximated 425% of
the Company's oil and gas production prior to the acquisition. As a result of
the foregoing the Company was engaged in only exploration and production for the
six months ended March 31, 2000 and comparison with the Company's operations for
the six months ended March 31, 1999 is neither meaningful nor applicable to the
Company's expected future operations. Accordingly, we have compared exploration
and production operations for the quarter ended March 31, 2000 with exploration
and production operations for the quarter ended December 31, 1999. Conversely,
for the other components of operations and net income (corporate general and
administrative expenses, other income (loss) and provisions for income taxes) we
have continued to compare fiscal 2000 year-to-date results with fiscal 1999
year-to-date results because changes in these components are not substantially
related to the Company's change in emphasis from natural gas marketing to
exploration and production. Instead, changes in these components are primarily
related to other factors.

         Exploration and Production

         Key exploration and production data for the quarters ended December 31,
1999 and March 31, 2000 are as follows:


                                      -12-

<PAGE>


                            Castle Energy Corporation
                   Notes to Consolidated Financial Statements
                  (Dollars in thousands, except share amounts)
                                   (Unaudited)

<TABLE>
<CAPTION>



                                                                Three Months        Three Months
                                                                   Ended                Ended
                                                                 March 31,           December 31,
                                                                    2000                 1999
                                                                 ---------             ---------
Production Volumes:
------------------
<S>                                                                 <C>                   <C>
      Barrels of crude oil (net)............................        61,820                69,188
      Mcf (thousand cubic feet) of natural gas (net)........       876,763             1,108,491
      Mcf equivalents (net) *...............................     1,247,683             1,523,619


Oil/Gas Prices:-

      Crude Oil/Barrel:
      -----------------
         Gross..............................................        $27.65                $23.70
         Hedging effects....................................        (10.81)                (3.82)
                                                                 ---------             ---------
         Net of hedging.....................................        $16.84                $19.88
                                                                 =========             =========

      Natural Gas/Mcf:
      ---------------
         Gross..............................................       $  2.58               $  2.50
         Hedging effects....................................          0.02                 (0.06)
                                                                 ---------             ---------
         Net of hedging.....................................       $  2.60               $  2.44
                                                                 =========             =========

Oil and Gas Production Expenses/mcf Equivalent..............       $  1.31               $  1.02
----------------------------------------------                   =========             =========

</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.

         Production volumes of oil and gas (mcf equivalents) decreased
approximately 18.1% from the first quarter of fiscal 2000 to the second quarter
of fiscal 2000. A significant portion of the production decline was expected due
to the generally fast decline curves associated with certain production acquired
from AmBrit. In addition, two wells which produced significant volumes for the
entire first quarter were shut in for most of the second quarter and contributed
to the decrease in production for the quarter. In addition, the Company's
recently acquired wells in West Delta Block 52 were shut in for most of the
quarter ended March 31, 2000 due to the reworking of the salt water disposal
well and compressor problems. The West Delta Block 52 wells produced
approximately 300 gross barrels of crude oil per day (180 net barrels per day to
the Company's interest) prior to shut down. Although these wells have been
returned to production at their previous rates, the shut down reduced
anticipated volumes for the second fiscal quarter by approximately two-thirds.




                                      -13-

<PAGE>


                            Castle Energy Corporation
                   Notes to Consolidated Financial Statements
                  (Dollars in thousands, except share amounts)
                                   (Unaudited)


         For the quarter ended March 31, 2000, the average gross price earned
per barrel of crude oil was $27.65 versus $23.70 for the quarter ended December
31, 1999. Generally, the Company receives oil prices for most of its crude of
equal to prices posted by major purchasers plus a premium of $.50-$2.50 per
barrel. For the quarter ended March 31, 2000, the price earned by the Company
was approximately $1.96 above the average posted price. For the quarter ended
December 31, 1999, the premium above posted prices was approximately $1.89 per
barrel. For the quarter ended March 31, 2000, the Company incurred a hedging
loss of $10.81 per barrel of crude oil because it had hedged most of its
expected production for this quarter in July of 1999 based upon the average
prices of crude oil traded on the New York Mercantile Exchange (NYMEX) at that
time - $20.02 per barrel. This resulted in a net price earned per barrel of
crude oil sold of $16.84 per barrel versus an average hedged price at $20.63 per
barrel and a net price of $19.88 per barrel for the first quarter of fiscal
2000.

         The Company has hedged 88,000 barrels of its expected crude oil
production through July of 2000 at an average price of $19.40 based upon NYMEX
prices. The Company has settled its hedges for 44,000 barrels of crude oil for
April and May at an average price of $27.68 per barrel resulting in a hedging
loss of $357. The Company expects that the price it realizes for its crude will
be less than the NYMEX price after taking into account the premiums over posted
crude oil prices that it receives. The Company has not hedged any of its
anticipated crude oil production expected after July 31, 2000 and thus remains
subject to crude oil price risk for anticipated crude oil production after July
31, 2000. Subsequent to March 31, 2000, crude oil prices decreased 10%-15%.

         For the quarter ended March 31, 2000 average gross natural gas prices
earned by the Company were $2.58 per mcf versus $2.50 per mcf for the quarter
ended December 31, 1999. For the quarter ended December 31, 1999 hedging losses
reduced the net price earned to $2.44 per mcf. For the quarter ended March 31,
2000, hedging increased the net price earned to $2.60 per mcf. The Company has
not hedged any of its anticipated future natural gas production and thus remains
exposed to future increases or decreases in natural gas prices. Subsequent to
March 31, 2000, natural gas prices increased 15%-20% and have recently reached
their highest levels in several years. If such prices remain high the Company's
gas sales will increase because the Company sells most of its natural gas at
market prices and has not hedged any anticipated future natural gas production.
There can, however, be no assurance that natural gas prices will remain high.

         Oil and gas unit production expenses for the quarter increased 28.4%
from $1.02 per mcf equivalent for the quarter ended December 31, 2000 to $1.31
per mcf equivalent for the quarter ended March 31, 2000. Most of the increase in
oil and gas production costs per mcf equivalent were due to an 18.1% production
decrease in the second quarter. Whereas production may vary due to several
factors, including depletion of production reservoirs and temporary shut downs,
production costs such as pumper salaries, operating overhead and field office
costs often remain stable or increase with time. Such is the case when the
second quarter production expenses are compared with those from the first
quarter. The Company also attributes its relatively high unit production costs
to the fact that a higher proportion of the properties acquired from AmBrit are
operated by outside

                                      -14-

<PAGE>


                            Castle Energy Corporation
                   Notes to Consolidated Financial Statements
                  (Dollars in thousands, except share amounts)
                                   (Unaudited)


parties who charge operating fees to operate the related wells in which the
Company has an interest. Some of these operating fees are especially high given
the volumes produced from the related wells. The Company is currently in the
process of attempting to sell several marginal properties in which it has an
interest and believes that such sales, if consummated, would reduce the
production cost per mcf equivalent in the future. Finally, the Company has
recently undertaken a higher than normal number of non capitalized repair and
maintenance operations on the wells acquired from AmBrit and believes that the
level of repairs and maintenance may decrease as a result in the future.
Nevertheless, there can be no assurance that production expenses will decrease
absolutely or per mcf equivalent produced in the future. Since the Company has
acquired several new properties and drilled several wells in the six months
ended March 31, 2000, such expenses will probably increase on an absolute basis
even if they decrease on a unit basis simply because the Company owns interests
in more producing wells and larger interests in some existing wells.

         Other Components of Operations

         Interest income decreased $551 or 58.3% from the first half of fiscal
1999 to the first half of fiscal 2000. The decrease is primarily attributable to
a decrease in the average balance of cash outstanding during the periods being
compared.

         Other income decreased $91 from income of $34 for the six months ended
March 31, 1999 to a loss of $57 for the six months ended March 31, 2000. The
primary reason for the decrease was the settlement of the Rex Nichols et al
lawsuit in April 2000 for $120. The settlement was recorded as of March 31, 2000
because the lawsuit was filed and related to transactions before March 31, 2000.
There was no similar lawsuit settlement during the six-month period ended March
31, 1999.

         The tax provision for the six months ended March 31, 1999 primarily
represents the amortization of the Company's net deferred tax asset at an
effective rate of 36% of pre-tax book income. No analogous tax recovery has been
recorded for the six months ended March 31, 2000 because the only significant
income taxes the Company has paid in the last three years, federal alternative
minimum taxes, are not recoverable through carryback of losses - such as that
sustained for the six months ended March 31, 2000.

         Earnings per Share

         On December 29, 1999, the Company's Board of Directors declared a stock
split in the form of a 200% stock dividend applicable to all stockholders of
record on January 12, 2000. The effect of the stock split was to triple the
number of shares outstanding. The stock split did not apply to the Company's
treasury stock. The stock split is reflected retroactively in share amounts and
earnings per share computations in the accompanying financial statements.

         In addition, from January 1, 1999 to March 31, 2000, the Company
reacquired 628,100 shares of its common stock. As a result of these share
acquisitions, earnings per outstanding share for the three and six month periods
ended March 31, 2000 and 1999 have been higher than would

                                      -15-

<PAGE>


                            Castle Energy Corporation
                   Notes to Consolidated Financial Statements
                  (Dollars in thousands, except share amounts)
                                   (Unaudited)


have been the case if no shares had been repurchased. Subsequent to March 31,
2000, the Company acquired an additional 195,000 of its shares.

LIQUIDITY AND CAPITAL RESOURCES

         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.

         During the six months ended March 31, 2000, the Company generated
$1,859 from operating activities. During the same period the Company invested
$7,516 in oil and gas properties and $3,551 to reacquire shares of its common
stock. In addition, it paid $718 in stockholder dividends. At March 31, 2000,
the Company had $11,281 of unrestricted cash, $22,671 of working capital and no
long-term debt.

         Discontinued Refining Operations

         Although the Company's former and present subsidiaries have exited the
refining business and third parties have assumed the related environmental
liabilities, if any, of such subsidiaries, the Company and several of its
subsidiaries remain liable for contingent environmental liabilities (see Item 3
to the Company's Form 10-K for the year ended September 30, 1999 and Note 4 to
Item 1 of Part I of this Form 10-Q.)

         Expected Sources and Uses of Funds

         As of May 5, 2000, the estimated minimum future cash expenditures of
the Company for the period from March 31, 2000 to September 30, 2001 are as
follows:

         a.   Oil and Gas Drilling



1.   Development drilling on existing acreage............     $5,749
2.   South Texas exploratory drilling ventures...........      1,150
3.   Romanian concession ................................      1,340
                                                             -------
                                                              $8,239
                                                             =======

              The first two wells in one of the two South Texas exploratory
              drilling ventures in which the Company participates resulted in
              two dry holes. The Company is obligated to participate in drilling
              a third exploratory well but may terminate its participation in
              this venture after the third well has been drilled whether or not
              it results in another dry hole.

                                      -16-

<PAGE>


                            Castle Energy Corporation
                   Notes to Consolidated Financial Statements
                  (Dollars in thousands, except share amounts)
                                   (Unaudited)


              The above estimate of drilling costs assumes that the Company will
              terminate its participation after the third well is drilled. If
              the third well is successful and the Company decides to continue
              to participate in the remaining nine wells originally planned, the
              Company's drilling costs are expected to increase by approximately
              $3,000 over that estimated above.

              In the second South Texas exploratory drilling venture in which
              the Company participates the first two wells drilled resulted in
              one dry hole and one producing well. The Company is obligated to
              participate in the drilling of two more exploratory wells in this
              drilling venture and expects to do so before September 30, 2000.
              If these two wells are successfully completed, the Company may
              participate in two more development locations resulting in
              additional drilling costs net to the Company of approximately
              $950. Such additional drilling costs are not included in the
              estimate above.

              The initial wildcat well on one of the Company's Romanian
              concessions was drilled in April and is currently being evaluated
              to determine the prospectivety of the geological structure and
              whether the wellbore can be completed as a producer or should be
              plugged. One of the Company's subsidiaries owns a 50%
              non-operating interest in the three Romanian concessions. The
              subsidiary expects to participate in drilling four additional
              wildcat wells before September 30, 2001. If these wildcat wells
              are successful, the Company's subsidiary could participate in the
              drilling of as many as fifty-five additional wells at an
              additional cost of approximately $18,550. Such additional costs
              are not included in the estimate above.

              As a result of the foregoing, if all future drilling is
              successful, the Company's future drilling costs could increase by
              as much as $22,500 over that estimated above.

         b.   Repurchase of Company Shares - As of May 5, 2000, the Company had
              repurchased 4,686,017 of its shares of common stock at a cost of
              $65,257. The Company's Board of Directors previously authorized
              the repurchase up to 5,819,949 shares (after taking into account
              the 200% stock dividend effective January 31, 2000) to provide an
              exit vehicle for investors who want to liquidate their investment
              in the Company. The decision whether to repurchase up to 581,949
              additional shares and/or to increase the repurchase authorization
              above 5,267,966 shares will depend upon the market price of the
              Company's stock, tax considerations, the number of stockholders
              seeking to sell their shares and other factors.

              The treasury shares repurchased by the Company through January 31,
              2000 were not affected by the Company's stock split.

         c.   Recurring Dividends - The Company's Board of Directors adopted a
              policy of paying a $.20 per share annual dividend ($.05 per share
              quarterly) in June of 1997. The Company

                                      -17-

<PAGE>


                            Castle Energy Corporation
                   Notes to Consolidated Financial Statements
                  (Dollars in thousands, except share amounts)
                                   (Unaudited)


              expects to continue to pay such dividend until the Board of
              Directors, in its sole discretion, changes such policy.

         d.   Acquisition of Oil and Gas Properties and Other Energy Investments
              - The Company is currently pursuing several other possible
              material investments in the energy sector. These possible
              investments include additional drilling ventures, the acquisition
              of oil and gas properties and oil and gas companies, as well as
              the acquisition of pipelines and gas marketing operations.
              Although most of these possible investments involve domestic
              properties, some involve investments overseas. Although the
              Company has recently concluded several transactions and believes
              it can conclude several additional transactions on terms favorable
              to the Company, there can be no assurance that such will be the
              case. Oil and gas prices have recently increased significantly and
              many potential sellers have decided not to sell or have not been
              forced to sell by their lenders. In addition, several sellers have
              raised the price for the properties they are selling given
              currently high oil and gas prices. Management believes that the
              acquisition of such properties at such high prices would not be in
              the Company's best interest. In addition, several large oil and
              gas companies have significantly more resources than the Company
              and other parties may be willing to pay more than the Company for
              a given acquisition. As a result, the Company may not be able to
              consummate the acquisitions it seeks to make at a reasonable
              price.

         At March 31, 2000, the Company had available the following sources of
funds:


Unrestricted cash - March 31, 2000...................................  $11,281
Line of credit - energy bank.........................................   30,000
Marketable securities of Penn Octane Corporation ("Penn Octane").....   10,077
                                                                       -------
                                                                       $51,358
                                                                       =======

         In addition, the Company anticipates significant future cash flow from
exploration and production operations.

         The Company also believes it could obtain additional financing through
the issuance of notes, debentures, preferred stock or additional shares of the
common stock of the Company should it require financing beyond the sources
listed above for a major acquisition.

         The Company thus expects that it can fund all of its present drilling
commitments from its own unrestricted cash and future operating cash flows. The
Company can also use its unrestricted cash and future cash flow and the proceeds
obtainable by liquidating its marketable securities, as well as up to $30,000
from its line of credit, to acquire additional oil and gas properties and to
conduct additional drilling. As a result, the Company believes it has available
the financing to make additional future acquisitions of up to approximately
$40,000-$50,000 while still funding its existing drilling commitments. The
Company has also negotiated with several potential industry partners

                                      -18-

<PAGE>


                   Castle Energy Corporation and Subsidiaries
                   Notes to Consolidated Financial Statements
                  (Dollars in thousands, except share amounts)
                                   (Unaudited)


who may provide financing if the Company decides to make an acquisition for
prices in excess of these amounts.

      The foregoing discussions do not contemplate any adverse effects from the
risk factors listed below:

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

         b.   Litigation - Long Trusts litigation. If the Company loses this
              case, its cash flow and future earnings would be adversely
              affected.

         c.   Reserve price risk - the effect of price changes on unhedged oil
              and gas production. The Company has not hedged most of its
              anticipated future production.

         d.   Exploration and production reserve risk - the effect of not
              finding the oil and gas reserves sought during new drilling -
              especially given the high percentage of exploratory and wildcat
              drilling in which the Company is participating.

         e.   Reserve risk - the effect of differences between estimated and
              actual reserves and production.

         f.   Public market for Company's stock. The Company's stock price has
              fluctuated significantly in the last quarter. Often such
              fluctuations have occurred although trading volumes have been
              insignificant.

         g.   Foreign operation risks. Since the Company has already incurred
              $1,987 and expects to spend a minimum of $1,340 in the next
              seventeen months to drill on its Romanian concessions, the
              Company's interests are subject to certain foreign country risks
              over which the Company has no control - including political risk,
              the risk of additional taxation and the possibility that foreign
              operating requirements and procedures may reduce estimated
              profitability.

         h.   The realization from the sale of the Company's investment in Penn
              Octane (common stock and options) is dependent on the market value
              of such stock and the Company's ability to liquidate its Penn
              Octane stock investment at or near market values. Since Penn
              Octane is thinly capitalized and traded, liquidation of a large
              volume of Penn Octane common stock, such as that owned by the
              Company, 1,067,667 shares, without significantly lowering the
              market price may be impossible. Subsequent to March 31, 2000, the
              market price of Penn Octane common stock decreased approximately
              21% to $7.50 per share on May 5, 2000.

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

                                      -19-

<PAGE>


                   Castle Energy Corporation and Subsidiaries
                   Notes to Consolidated Financial Statements
                  (Dollars in thousands, except share amounts)
                                   (Unaudited)



         j.   At the present time, the Company's general and administrative
              burden is high. The Company believes that it can reduce this
              burden by making several future oil and gas acquisitions without
              substantially increasing its general and administrative expenses
              but the Company has not been able to make any such large
              acquisitions since it acquired AmBrit in June 1999. In addition,
              the price at which the Company's stock has been trading has
              decreased significantly during the last three months as has the
              stock of many smaller public oil and gas exploration and
              production companies. As a result of the foregoing, the Company's
              Board of Directors may decide to sell the Company's assets and
              liquidate the Company, sell the Company's assets and make other
              investments or recommend a merger with another company. Complete
              liquidation of the Company, under such circumstances, would,
              however, probably require a significant time period given the
              Company's unresolved litigation, contingent environmental
              liabilities and the time necessary to sell the Company's reserves
              for the highest available price. Although the Company is currently
              seeking acquisitions of oil and gas properties and companies, its
              directors may decide to recommend one of these courses of actions
              or other restructuring actions given the relatively high prices
              currently being paid for oil and gas properties.

         The Company spent approximately $120 and devoted significant management
resources to address potential Year 2000 problems. No such problems
materialized.

         Readers should refer to the Management Discussion and Analysis of
Financial Condition and Results of Operations Section of the Company's Form 10-K
for the fiscal year ended September 30, 1998 for a description of the
aforementioned risk factors.

         If any or several of these risks materialize, the Company's estimated
financial position, cash flow and results of operations will probably be
adversely impacted and the impact may be material. Given the number and variety
of risks and the litigiousness of today's corporate world, it is reasonably
possible that one or more of these risks may adversely impact the Company's
future operations.


                                      -20-

<PAGE>


                   Castle Energy Corporation and Subsidiaries
                   Notes to Consolidated Financial Statements
                  (Dollars in thousands, except share amounts)
                                   (Unaudited)


Item 3.      QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

         At March 31, 2000, the Company had hedged 88,000 barrels of crude oil
that it expects to produce from April 1, 2000 to July 31, 2000 using futures
contracts. The average hedged price (based upon prices on the New York
Mercantile Exchange ("NYMEX")) for these hedged barrels is $19.40 per barrel.
The Company settled hedges for 44,000 barrels for April and May, 2000 delivery
at an average price of $27.68 per barrel resulting in a loss of $357. The
current average settlement price for the 44,000 barrels hedged for June and
July, 2000 is $26.29 per barrel. Accordingly, if the Company settled all of its
crude oil hedges at the current settlement prices, its crude oil sales would
decrease by approximately another $311. Although the price the Company receives
for its production is less than NYMEX pricing due to location basis
differentials, the Company's management believes that NYMEX pricing is highly
correlated to its production field prices. Accordingly, management expects that
any changes in NYMEX prices will be offset by similar changes in the field
prices the Company receives for is production. If NYMEX prices increase or
decrease ten percent, management expects that the Company's field prices would
also increase or decrease approximately ten percent.

         Excluding the 88,000 barrels of hedged crude oil production above,
which constitute in excess of 90% of the Company's expected crude oil production
during this period, the Company has not hedged its remaining expected crude oil
production or any of its expected natural gas production. As a result, the
Company remains at risk with respect to such unhedged expected production. If
oil and gas market prices increase, oil and gas sales applicable to the unhedged
production will increase. If oil and gas market prices decrease, oil and gas
sales related to such unhedged production will decrease.


                                      -21-

<PAGE>




                           PART II. OTHER INFORMATION


Item 1.      Legal Proceedings

        For information regarding lawsuits, reference is made to Item 3 of the
Company's Form 10-K (Annual Report) for the fiscal year ended September 30,
1999. Also see Note 4 to the March 31, 2000 financial statements included in
Part I.

Item 6.    Exhibits and Reports on Form 8-K

           (A)   Exhibits:
                    Exhibit 10.136 -     Promissary Note between CEC, Inc. and
                                         Penn Octane Corporation

                    Exhibit 10.137 -     Purchase Agreement between CEC, Inc.
                                         and Penn Octane Corporation, Effective
                                         January 5, 2000

                    Exhibit 11.1 -       Statement re: Computation of Earnings
                                         Per Share

                    Exhibit 27 -         Financial Data Schedule

           (B)  Reports on Form 8-K:  None



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<PAGE>





                                   SIGNATURES


        Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.


       Date:      May 12, 2000                   CASTLE ENERGY CORPORATION
              ----------------------



                                                 /s/Richard E. Staedtler
                                                 -------------------------
                                                 Richard E. Staedtler
                                                 Chief Financial Officer
                                                 Chief Accounting Officer



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