<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549



                                    FORM 10-Q

(Mark One)
<TABLE>
<CAPTION>
<S>        <C>                                                                      <C>
/X/        QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
           EXCHANGE ACT OF 1934

For the quarterly period ended              December 31, 2001
                               ---------------------------------------------------------------

                                       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)


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


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


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


-----------------------------------------------------------------------------------------------
      (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
</TABLE>

         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: 6,632,884 shares of
Common Stock, $.50 par value, outstanding as of February 6, 2002.



<PAGE>





                            CASTLE ENERGY CORPORATION

<TABLE>
<CAPTION>
                                                        INDEX

                                                                                                       Page #
<S>            <C>                                                                                     <C>
Part I.      Financial Information

             Item 1. Financial Statements:

                     Consolidated Balance Sheets - December 31, 2001 (Unaudited) and
                     September 30, 2001............................................................        2

                     Consolidated Statements of Operations - Three Months Ended December 31,
                     2001 and 2000 (Unaudited)......................................................       3

                     Condensed Consolidated Statements of Cash Flows - Three Months Ended
                     December 31, 2001 and 2000 (Unaudited).........................................       4

                     Consolidated Statements of Stockholders' Equity and Other Comprehensive
                     Income - Year Ended September 30, 2001 and Three Months Ended
                     December 31, 2001 (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.......................    17

Part II.     Other Information

             Item 1. Legal Proceedings................................................................    18

             Item 6. Exhibits and Reports on Form 8-K.................................................    18

Signature    .........................................................................................    19

</TABLE>



    The accompanying notes are an integral part of these financial statements

                                       -1-

<PAGE>



                          PART I. FINANCIAL INFORMATION

Item 1.  Financial Statements


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

<TABLE>
<CAPTION>

                                                                                        December 31,        September 30,
                                                                                            2001                2001
                                                                                            ----                ----
                                                                                         (Unaudited)
<S>                                                                                    <C>                   <C>
                                     ASSETS
Current assets:
    Cash and cash equivalents...................................................            $  3,989            $  5,844
    Restricted cash.............................................................                 217                 370
    Accounts receivable.........................................................               2,426               2,787
    Marketable securities.......................................................               6,599               6,722
    Prepaid expenses and other current assets...................................                 342                 277
    Estimated realizable value of discontinued net refining assets..............                 612                 612
    Deferred income taxes.......................................................               2,025               1,879
                                                                                            --------            --------
      Total current assets......................................................              16,210              18,491
Property, plant and equipment, net:
    Natural gas transmission....................................................                  50                  51
    Furniture, fixtures and equipment...........................................                 196                 222
    Oil and gas properties, net (full cost method):
      Proved properties.........................................................              38,864              39,843
      Unproved properties not being amortized...................................                 233                 110
    Investment in Networked Energy LLC..........................................                 367                 401
                                                                                            --------            --------
      Total assets..............................................................            $ 55,920            $ 59,118
                                                                                            ========            ========

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
    Dividend payable............................................................           $     331          $      331
    Accounts payable............................................................               1,146               3,543
    Accrued expenses............................................................                 221                 292
    Accrued taxes on appreciation of marketable securities......................                 856                 900
    Net refining liabilities retained...........................................               3,016               3,016
                                                                                            --------            --------
      Total current liabilities.................................................               5,570               8,082
Long-term liabilities...........................................................                   9                   9
                                                                                            --------            --------
      Total liabilities.........................................................               5,579               8,091
                                                                                            --------            --------
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 December 31, 2001 and September 30,
      2001......................................................................               5,752               5,752
    Additional paid-in capital..................................................              67,365              67,365
    Accumulated other comprehensive income - unrealized gains on
      marketable securities, net of taxes.......................................               1,521               1,600
    Retained earnings...........................................................              42,209              42,816
                                                                                            --------            --------
                                                                                             116,847             117,533
    Treasury stock at cost - 4,871,020 shares at December 31, 2001 and
      September 30, 2001........................................................             (66,506)            (66,506)
                                                                                            --------            --------
      Total stockholders' equity................................................              50,341              51,027
                                                                                            --------            --------
      Total liabilities and stockholders' equity................................            $ 55,920            $ 59,118
                                                                                            ========            ========

</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>


                                                                                     Three Months Ended December 31,
                                                                                    ---------------------------------
                                                                                     2001                     2000
                                                                                     ----                     ----
<S>                                                                                <C>                     <C>
Revenues:
    Oil and gas sales..................................................              $   3,441               $   5,394
                                                                                     ---------               ---------

Expenses:
    Oil and gas production.............................................                  1,254                   1,404
    General and administrative.........................................                  1,371                   1,758
    Depreciation, depletion and amortization...........................                  1,242                     699
                                                                                     ---------               ---------
                                                                                         3,867                   3,861
                                                                                     ---------               ---------

Operating income (loss)................................................                   (426)                  1,533
                                                                                     ---------               ---------
Other income (expense):
    Interest income....................................................                     33                     212
    Other income.......................................................                      1                       6
    Equity in loss of Networked Energy LLC.............................                    (34)                    (16)
                                                                                     ---------               ---------
                                                                                             0                     202
                                                                                     ---------               ---------

Income (loss) before provision for income taxes........................                   (426)                  1,735
                                                                                     ---------               ---------
Provision for (benefit of) income taxes:
    State..............................................................                     (4)                     17
    Federal............................................................                   (150)                    608
                                                                                     ---------               ---------
                                                                                          (154)                    625
                                                                                     ---------               ---------
Net income (loss)......................................................              ($    272)              $   1,110
                                                                                     =========               =========
Net income (loss) per share:
    Basic..............................................................              ($    .04)              $     .17
                                                                                     =========               =========
    Diluted............................................................              ($    .04)              $     .16
                                                                                     =========               =========
Weighted average number of common and potential dilutive common shares
  outstanding:
    Basic..............................................................              6,632,884               6,680,404
                                                                                     =========               =========
    Diluted............................................................              6,753,630               6,899,633
                                                                                     =========               =========

</TABLE>




    The accompanying notes are an integral part of these financial statements

                                       -3-

<PAGE>




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

<TABLE>
<CAPTION>

                                                                                       Three Months Ended December 31,
                                                                                      ---------------------------------
                                                                                         2001                   2000
                                                                                         ----                   ----
<S>                                                                                     <C>                      <C>
Net cash flow provided by (used in) operating activities.................               ($1,165)               $ 1,809
                                                                                        -------                -------
Cash flows from investing activities:
       Sale of oil and gas properties....................................                                           40
       Investment in oil and gas properties..............................                  (358)                (1,144)
       Investment in furniture, fixtures and equipment...................                    (1)
                                                                                        -------                -------
         Net cash (used in) investing activities.........................                  (359)                (1,104)
                                                                                        -------                -------
Cash flows from financing activities:
       Dividends paid to stockholders....................................                  (331)                  (333)
       Acquisition of treasury stock.....................................                                         (300)
                                                                                        -------                -------
         Net cash (used in) financing activities.........................                  (331)                  (633)
                                                                                        -------                -------
Net increase (decrease) in cash and cash equivalents.....................                (1,855)                    72
Cash and cash equivalents - beginning of period..........................                 5,844                 11,525
                                                                                        -------                -------
Cash and cash equivalents - end of period................................                $3,989                $11,597
                                                                                        =======                =======
</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, 2001 and Three Months Ended December 31, 2001 (Unaudited)
                                    ----------------------------------------------------------------------------------
                                                                                              Accumulated
                                              Common Stock       Additional                      Other
                                           -------------------    Paid-In    Comprehensive   Comprehensive
                                           Shares      Amount     Capital        Income          Income
                                           ------      ------    ----------- --------------  -------------
<S>                                        <C>         <C>          <C>          <C>            <C>
Balance - October 1, 2000...............  11,503,904   $5,752        $67,365                     $4,671
Stock acquired..........................
Dividends declared ($.05 per
  share)................................
Comprehensive income:
  Net income............................                                          $1,716
  Other comprehensive income:
     Unrealized (loss) on marketable
      securities, net of tax............                                          (3,071)        (3,071)
                                                                                  ------
                                                                                 ($1,355)
                                           ----------  ------        -------      ======         ------
Balance - September 30, 2001............   11,503,904   5,752         67,365                      1,600
Dividends declared ($.05 per share).....
Dividend adjustment.....................
Comprehensive income (loss):                                                     ($  272)
  Net income (loss).....................
  Other comprehensive income (loss).....
     Unrealized (loss) on marketable
      securities, net of tax............                                             (79)           (79)
                                                                                  ------
                                                                                 ($  351)
                                           ----------  ------        -------      ======         ------
Balance - December 31, 2001.............   11,503,904  $5,752        $67,365                     $1,521
                                           ==========  ======        =======                     ======

[RESTUBBED TABLE]



                                              Retained          Treasury Stock
                                              Earnings       ---------------------
                                              (Deficit)      Shares        Amount     Total
                                              ---------      ------      ---------   -------
Balance - October 1, 2000...............       $42,422      4,791,020    ($65,934)   $54,276
Stock acquired..........................                       80,000        (572)      (572)
Dividends declared ($.05 per
  share)................................        (1,322)                               (1,322)
Comprehensive income:
  Net income............................         1,716                                 1,716
  Other comprehensive income:
     Unrealized (loss) on marketable
      securities, net of tax............                                              (3,071)

                                               -------      ---------    ---------   -------
Balance - September 30, 2001............        42,816      4,871,020      (66,506)   51,027
Dividends declared ($.05 per share).....          (331)                                 (331)
Dividend adjustment.....................            (4)                                   (4)
Comprehensive income (loss):                      (272)                                 (272)
  Net income (loss).....................
  Other comprehensive income (loss).....
     Unrealized (loss) on marketable
      securities, net of tax............                                                 (79)

                                               -------      ---------    ---------   -------
Balance - December 31, 2001.............       $42,209      4,871,020     ($66,506)  $50,341
                                               =======      =========    =========   =======

</TABLE>




    The accompanying notes are an integral part of these financial statements



                                     - 5 -

<PAGE>


                   Castle Energy Corporation and Subsidiaries
                   Notes to Consolidated Financial Statements
                    ("$000's" Omitted 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, where applicable, 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 period ended December 31, 2001 are not necessarily
indicative of the results that may be expected for the fiscal year ending
September 30, 2002 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, 2001.

         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 periods ended December 31, 2001 and 2000 and
for a fair statement of financial position at December 31, 2001.

Note 2 - September 30, 2001 Balance Sheet
-----------------------------------------

         The amounts presented in the balance sheet as of September 30, 2001
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, 2001.

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 of the refining assets sold by Powerine and is no longer a subsidiary
of the Company. The Company's remaining refining subsidiaries own no refining
assets, have been inactive for over six years and are inactive and 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.

Note 4 - Contingencies/Litigation
---------------------------------

        Contingent Environmental Liabilities

        In December 1995, Indian Refining I Limited Partnership ("IRLP"), an
inactive subsidiary of the Company, sold its refinery, the Indian Refinery, to
American Western Refining L.P. ("American Western"), an unaffiliated party. As
part of the related purchase and sale agreement, American Western assumed all
environmental liabilities and indemnified IRLP with respect thereto.
Subsequently, American Western filed for bankruptcy and sold the Indian Refinery
to an outside party pursuant to a bankruptcy proceeding. The outside party has
substantially dismantled the Indian Refinery. American Western recently filed a
Plan of Liquidation. American Western anticipated that the Plan of Liquidation
would be confirmed in January 2002 but confirmation has been delayed because of
legal challenges by Chevron/Texaco, the parent of Texaco Refining and Marketing
("Texaco"), the operator of the Indian Refinery for over 50 years.

        During fiscal 1998, the Company was informed that the United States
Environmental Protection Agency ("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.

                                       -6-
<PAGE>

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

        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 the Indian Refinery. In addition, eighteen other parties were named
including Texaco. A subsidiary of Texaco had owned the refinery until December
of 1988. The Company subsequently responded to the EPA indicating that it was
neither the owner nor the operator of the Indian Refinery and thus not
responsible for its remediation.

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

        On August 7, 2000, the Company received notice of a claim against it and
two of its inactive refining subsidiaries from Texaco and its parent. 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 has already incurred
addressing environmental contamination at the Indian Refinery. Finally, Texaco
also claimed that the Company and two of its inactive subsidiaries are liable to
Texaco under the Federal Comprehensive Environmental Response Compensation and
Liability Act as owners and operators of the Indian Refinery. The Company
responded to Texaco disputing the factual and theoretical basis 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.

        The Company and its special counsel believe that Texaco's claims are
utterly without merit and the Company intends to vigorously defend itself
against Texaco's claims and any lawsuits that may follow. In addition to the
numerous defenses that the Company has against Texaco's contractual claim for
indemnity, the Company and its special counsel believe that by the express
language of the agreement which Texaco construes to create an indemnity, Texaco
has irrevocably elected to forgo all rights of contractual indemnification it
might otherwise have had against any person, including the Company.

        In September 1995, Powerine sold the Powerine Refinery to Kenyen
Resources ("Kenyen"), an unaffiliated party. In January 1996, Powerine merged
into a subsidiary of Energy Merchant Corp. ("EMC"), an unaffiliated party, and
EMC assumed all environmental liabilities. In August 1998, EMC sold the Powerine
Refinery to a third party, which, we are informed, is seeking to sell the
Powerine Refinery plant.

        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 summons based upon
lack of jurisdiction and the Company is no longer involved in the case.

        Although any environmental liabilities related to the Indian Refinery
and 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, owner of the Indian Refinery, filed for bankruptcy and is in the
process of liquidation. EMC, which assumed the environmental liabilities of
Powerine, sold the Powerine Refinery to an unrelated party, which we understand
is still seeking financing to restart that refinery. Furthermore, as noted
above, the EPA named the Company as a potentially responsible party for
remediation of the Indian Refinery and has requested and received relevant
information from the Company. Estimated gross undiscounted clean-up costs for
this refinery are at least $80,000-$150,000 according to third parties. If the
Company were found liable for the remediation of the Indian Refinery, it could
be required to pay a percentage of the clean-up costs. Since the Company's
subsidiary only operated the Indian Refinery five years, whereas Texaco and
others operated it over fifty years, the Company would expect that its share of
remediation liability would be proportional to its years of operation, although
such may not be the case. Furthermore, as noted above, Texaco has claimed that
the Company indemnified it for all environmental liabilities related to the
Indian Refinery. If Texaco were to sue the Company on this theory and prevail in
court, the Company could be held responsible for the entire estimated clean up
costs of $80,000-$150,000 or more. In such a case, this cost would be far in
excess of the Company's financial capability.

                                       -7-
<PAGE>

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

        An opinion issued by the U.S. Supreme Court in June 1998 in a comparable
matter and a recent opinion by the U.S. Appeals Court for the Fifth Circuit
support the Company's positions. Nevertheless, if funds for environmental
clean-up are not provided by these former and/or present owners, it is possible
that the Company and/or one 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 is ultimately held liable
in such a circumstance, should litigation involving the Company and/or IRLP
occur, the Company would probably incur substantial legal fees and experience a
diversion of management resources from other operations.

        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 of these matters due to
inherent uncertainties.

        Litigation

           Long Trusts Lawsuit

            In November 2000, the Company and three of its subsidiaries were
defendants in a jury trial in Rusk County, Texas. The plaintiffs in the case,
the Long Trusts, are non-operating working interest owners in 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 Union Pacific Resources Corporation ("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 other defendants, claiming (among other things) breach of
contract, breach of fiduciary duty, conversion and conspiracy. The plaintiffs
sought actual damages, exemplary damages, pre-judgment and post-judgment
interest, attorney's fees and court costs. CTPLP counterclaimed for
approximately $150 of unpaid joint interests billings plus interest, attorneys'
fees and court costs.

            After a three-week trial, the District Court in Rusk County
submitted 36 questions to the jury which covered all of the claims and
counterclaims in the lawsuit. Based upon the jury's answers, the District Court
entered judgement granting plaintiffs' claims against the Company and its
subsidiaries, as well as CTPLP's counterclaim against the plaintiffs. The
District Court issued an amended judgement 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 have filed a notice of
appeal with the Tyler Court of Appeals and will continue to vigorously contest
this matter.

            Special counsel to the Company does not consider an unfavorable
outcome to this lawsuit probable. The Company's management and special counsel
believe that several of the plaintiffs' primary legal theories are contrary to
established Texas law and that the Court's charge to the jury was fatally
defective. They further believe that any judgment for plaintiffs based on those
theories or on the jury's answers to certain questions in the charge cannot
stand and will be reversed on appeal. As a result, the Company has not accrued
any liability for this litigation. Nevertheless, 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 plaintiffs and to maintain that bond until the
resolution of the appeal which may take several years. 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 letter of credit supporting this bond was provided by the Company's
lender pursuant to the Company's $40,000 line of credit with that lender.

                                       -8-
<PAGE>

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


            Pilgreen Litigation

            As part of the oil and gas properties acquired from AmBrit Energy
Corp. ("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 Pilgreen #2ST gas well. Because of title disputes, AmBrit and
other interest owners had previously filed claims against the operator of the
Pilgreen well, and CECI acquired post January 1, 1999 rights in that litigation.
Although revenue attributed to the ORRI has been suspended by the operator since
first production, because of recent related appellate decisions and settlement
negotiations, the Company believes that revenue attributable to CECI's ORRI
should be released to CECI in the near future, although another working interest
owner has recently raised a question as to the manner in which the ORRI should
be calculated. As of December 31, 2001, approximately $466 attributable to
CECI's share of the ORRI revenue in the Pilgreen #25T well and related leasehold
was suspended, including revenue attributable to an additional well drilled on
the lease. The Company's policy is to recognize the suspended revenue only when
and if it is received.

Note 5 - New Accounting Pronouncements
--------------------------------------

        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 and SFAS
138 standardize 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,
depends 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. The Company adopted
SFAS No. 133 and SFAS No. 138 effective October 1, 2000. The Company ceased
hedging its oil and gas production in July 2000. At December 31, 2001 and
September 30, 2001, the Company had no freestanding derivative instruments in
place and had no embedded derivative instruments. As a result, the Company's
adoption of SFAS No. 133 and SFAS No. 138 had no impact on its results of
operations or financial condition.

        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 will adopt SFAS No. 142
in the first quarter of fiscal 2003. The Company does not believe that its
future adoption of SFAS No. 142 will have a material effect on its results of
operations.

                                       -9-
<PAGE>

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

        In June 2001, the 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 will adopt SFAS 143 effective October 1, 2002.
At this time, the Company cannot reasonably estimate the effect of the adoption
of this statement on either its financial position or results of operations.

        In August 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"), which will be
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. After its effective date, SFAS No. 144 will be applied to those
transactions where appropriate. The Company will adopt SFAS No. 144 effective
October 1, 2002. At this time the Company is unable to determine what the future
impact of adopting this statement will have on its financial position or results
of operations.

Note 6 - Information Concerning Reportable Segments
---------------------------------------------------

        For the periods ended December 31, 2001 and 2000, the Company operated
in only one segment of the energy industry, oil and gas exploration and
production. Until May 31, 1999, the Company also operated in the natural gas
marketing segment of the energy industry.

Note 7 - Sale of Domestic Exploration and Production Assets
-----------------------------------------------------------

        On January 15, 2002, the Company entered into an agreement to sell its
domestic oil and gas properties to Delta Petroleum Company, a public exploration
and production company headquartered in Denver, Colorado ("Delta"). The purchase
price is $20,000 plus 9,566,000 shares of Delta's common stock, which would
result in the Company owning approximately 43% of Delta. The effective date of
the sale is October 1, 2001 and closing is expected by April 30, 2002. It is
possible that closing could be postponed because closing is subject to approval
of Delta's shareholders, a process requiring regulatory approval. Pursuant to
the terms of the purchase and sale agreement, the cash portion of the purchase
price will be reduced by the cash flow from the properties between the effective
date and the closing date. Each party is subject to penalties for failure
to close the transaction. In addition, Delta may repurchase up to 3,188,667 of
its shares from Castle for $4.50 per share for a period of one year after
closing and Delta agreed to nominate three directors selected by the Company to
Delta's Board of Directors which is currently comprised of four directors. The
agreement also includes a provision whereby Delta may pay a portion of the cash
purchase price with a 270 day note bearing interest of 8% if Delta is unable to
fund the entire cash portion of the purchase price. The note plus accrued
interest is payable in cash or Delta's common stock (at $3.00/share) at Delta's
option. Although the Company anticipates that Delta will be deemed the acquirer
for accounting purposes, there is a remote possibility that the Company could be
construed as the acquirer if sufficient additional shares of Delta's common
stock were issued to the Company. If this occurs, the Company will account for
the transaction as an acquisition of Delta using the purchase method and will
include the financial results of Delta in its consolidated financial statements.

                                      -10-
<PAGE>

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

        The Company currently expects that the proceeds on the sale will exceed
the current carrying value of the oil and gas properties to be sold. Any
resultant gain recorded by the Company upon sale will be dependent to a large
extent upon the market price of Delta's common stock at the time the transaction
closes and the nature of the proceeds received. Given the volatility of oil and
gas prices and other factors, there can be no assurance that the transaction
will close as planned or that the Company will recognize a gain on the
transaction in its financial statements. Portions of any gain recorded will be
deferred due to the Company's indirect retention of interest in the properties
sold as a result of its ownership interest in Delta after the sale. After the
sale the Company expects to hold 43% of Delta's outstanding stock which will be
recorded on the equity method. Under this method the Company records its share
of Delta's income or loss with an offsetting entry to the carrying value of the
Company's investment. Cash distributions, if any, are recorded as a reduction in
the carrying value of the Company's investment. If at any time prior to the
completion of the sale the Company estimates that it would record a loss on
disposition, the loss would be recorded when estimated in accordance with SFAS
No. 121.




























                                      -11-
<PAGE>

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

                     ("$000's" Omitted Except Share Amounts)

RESULTS OF OPERATIONS

        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 subsidiary, IRLP, owns no refining assets
and is in the process of liquidation. As a result, the Company has accounted for
its refining operations as discontinued operations in the Company's financial
statements as of September 30, 1995 and retroactively. Accordingly, discussion
of results of operations has been confined to the results of continuing
exploration and production operations and the anticipated impact, if any, of
liquidation of the Company's remaining inactive refining subsidiary and
contingent environmental liabilities of the Company or its refining
subsidiaries.

        Exploration and Production

        Key exploration and production data for the quarters ended December 31,
2001 and 2000 are as follows:

<TABLE>
<CAPTION>
                                                                                       Three Months Ended December 31,
                                                                                       -------------------------------
                                                                                          2001                  2000
                                                                                          ----                  ----
<S>                                                                                    <C>                    <C>
         Production Volumes:
         ------------------
                Barrels of crude oil (net)...............................                 69,315                67,798
                Mcf (thousand cubic feet) of natural gas (net)...........                857,043               751,064
                Mcf equivalents (mcfe) (net) *...........................              1,272,933             1,157,852

         Oil/Gas Prices:
         --------------
                Crude Oil/Barrel:                                                         $20.47                $29.46
                ----------------                                                          ======                ======

                Natural Gas/Mcf:                                                         $  2.36                $ 4.52
                ---------------                                                          =======                ======

                Oil and Gas Production Expenses/Mcf Equivalent...........               $    .99               $  1.21
                ----------------------------------------------                          ========               =======
</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 $2,490 from the first quarter of fiscal
2001 to the first quarter of fiscal 2002 due to a decrease in oil and gas
prices. The average price per equivalent mcfe decreased from $4.66/mcfe for the
quarter ended December 31, 2000 to $2.70/mcfe for the quarter ended December 31,
2001. The decline in the price received for natural gas was especially
precipitous. For the quarter ended December 31, 2000, the average price recorded
per mcf of natural gas was $4.52 versus only $2.36 per mcf for the quarter ended
December 31, 2001. Since the Company has not hedged its oil and gas production,
the Company's oil and gas sales can be expected to increase or decrease roughly
parallel with increases and decreases in oil and gas prices. Although most
reputable industry experts are predicting only a modest increase in average oil
and gas prices over the next two or three years, such prices have proved to be
extremely volatile in the past. Changes in weather, the economy, international
politics and worldwide political and other factors could cause similar
volatility in oil and gas prices in the future.

         Oil and gas sales increased $537 as a result of increases in oil and
gas production. From the quarter ended December 31, 2000 to the quarter ended
December 31, 2001 oil production increased 1,517 barrels (approximately 16
barrels a day) and natural gas production increased 105,979 mcf (approximate1y,
1,152 mcf/day). The increase in production is primarily due to production from
the acquisition of interests in twenty-one East Texas oil and gas wells on April
30, 2001, recent recompletions and reworks on existing wells in which the
Company owns an interest as well as several successful new wells in which the
Company participated during the last six months. Such increases in production
more than offset the natural depletion of the Company's remaining wells.

                                      -12-
<PAGE>

         As a result of the $2,490 decrease due to oil and gas prices and the
$537 increase due to oil and gas production, there was a net decrease of $1,953
or 36.2% in oil and gas sales from the quarter ended December 31, 2000 to the
quarter ended December 31, 2001.

         Oil and gas production expenses decreased $150 or 10.7% from the first
quarter of fiscal 2001 to the first quarter of fiscal 2002. For the quarter
ended December 31, 2001, such expenses were $.99 per equivalent mcf of
production versus $1.21 per equivalent mcf of production for the quarter ended
December 31, 2000. The decrease is primarily attributable to a higher amount of
nonrecurring repairs and maintenance incurred during the quarter ended December
31, 2000 than during the quarter ended December 31, 2001. Such expenses are
typically not incurred ratably throughout the year but are incurred when and if
certain wells require repair and maintenance. As a result, such comparisons are
more appropriate on an annual or a multi-year basis than on a quarterly basis.

         As noted above, the net cash flow (oil and gas sales less oil and gas
production expenses) from the Company's oil and gas properties from October 1,
2001 to the expected closing of the Delta transaction will reduce the cash
portion of the purchase price the Company expects to receive from the sale of
its domestic oil and gas properties. Accordingly, the net cash flow for the
quarter ended December 31, 2001 of $2,187, subject to some minor adjustments,
will ultimately accrue to Delta's account rather than to the Company's account
if the sale to Delta is ultimately consummated as planned.

         General and administrative expenses decreased $387 or 22% from the
quarter ended December 31, 2000 to the quarter ended December 31, 2001. The
decrease was primarily attributable to decreased legal expenses and $181 of
non-recurring costs related to the Company's previous effort to sell its oil and
gas properties that terminated in December 2000 without a sale.

         Depreciation, depletion and amortization increased $543 or 77.7% from
the first quarter of fiscal 2001 to the fiscal quarter of fiscal 2002. This net
increase consists of a decrease of $15 in depreciation of equipment and
furniture and fixtures and a $558 increase in depletion of oil and gas
properties. The increase in depletion is primarily attributable to an increase
in the depletion rate. For the quarter ended December 31, 2001, the depletion
rate was $.95 per mcfe versus $.57 per mcfe for the quarter ended December 31,
2000. The increase in depletion rates is indirectly attributable to the
significant decreases in oil and gas prices that occurred between the two
periods being compared. As a result of lower oil and gas prices at December 31,
2001, the Company's economic oil and gas reserves decreased significantly and
the resultant cost per mcfe and depletion rate per mcfe increased significantly.

         Although the Company recorded no impairment provision for its domestic
oil and gas properties for either of the quarters ended December 31, 2000 or
December 31, 2001, it is possible that the Company could be required to record
such an impairment provision at March 31, 2002 or thereafter if oil and gas
prices decline. Under the full cost method of accounting for oil and gas
properties, net capitalized costs, less related deferred taxes, in excess of the
present value of net future cash inflows from proved reserves, tax effected and
discounted at 10%, are charged to current expense. Since December 31, 2001, oil
and gas prices have decreased significantly and as a result the present value of
future cash flows has also decreased. It is thus possible that an impairment
provision could be required in the future, although none was required at either
December 31, 2000 or December 31, 2001.

         Interest income decreased $179 from the first quarter of fiscal 2001 to
the first quarter of fiscal 2002. The decrease was caused by a decrease in
invested cash and a decrease in the rate of interest earned on such invested
cash.

         The tax benefit for the three months ended December 31, 2001 relates to
the tax loss the Company expects to recognize during this period and was
provided at an effective tax rate of 36%. Such tax loss was estimated as part of
the overall taxable gain the Company expects to recognize when it sells its
domestic oil and gas assets to Delta (see Note 7 to the consolidated financial
statements) and for which the Company recorded a deferred tax asset (net of a
valuation allowance) at September 30, 2001. If the sale to Delta does not close
as anticipated and oil and gas prices do not significantly improve, the Company
expects it will increase the valuation allowance applicable to its gross
deferred tax asset.

       The tax provision for the quarter ended December 31, 2000 represents the
utilization of a net deferred tax asset recorded at September 30, 2000 at an
effective tax rate of 36%. The deferred tax asset at September 30, 2000 resulted
when the Company reevaluated its ability to generate sufficient taxable income
to utilize the gross deferred tax asset attributable to its tax carryforwards.

                                      -13-
<PAGE>

       Since November of 1996, the Company has reacquired 4,871,020 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

       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,
including without limitation in conjunction with the expected cash sources and
expected cash obligations 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 three months ended December 31, 2001, the Company used $1,165
of cash in operating activities. During the same period the Company invested
$358 in oil and gas properties. In addition, it paid $331 in stockholder
dividends. At December 31, 2001, the Company had $3,989 of unrestricted cash,
$10,640 of working capital and no long-term debt.

       Although the Company's former and present subsidiaries have exited the
refining business and third parties have assumed environmental liabilities, if
any, of such subsidiaries, the Company and several of its subsidiaries may
remain liable for contingent environmental liabilities (see Note 4 to the
consolidated financial statements included in Item 1 of this Form 10-Q).

       As noted in Note 7 to the Consolidated Financial Statements, the Company
entered into a definitive agreement to sell all of its domestic oil and gas
properties to Delta. Closing is expected by April 30, 2002 (see below). Assuming
closing occurs when expected, the Company anticipates the following expenditures
for investing and financing activities from January 1, 2002 to April 30, 2002:



         Additional investment in Networked Energy LLC
           ("Networked")...............................       $  500
         Estimated drilling costs for participation in
           wildcat well in the Black Sea (excludes
           completion costs)...........................        1,000
         Dividends to shareholders.....................          662
         Recompletions and reworks on existing wells...          250
                                                              ------
                                                              $2,412
                                                              ======

        As a result of current low oil and gas prices and the Company's
recurring general and administrative expense burden, the Company may not be able
to fund these planned expenditures from operating cash flow. If such is the
case, the Company's directors may decide to cease declaring and paying dividends
to stockholders. In addition, the Company could decide to defer or simply not
make further investment in Networked and/or to sell or farm out its interest in
the wildcat well expected to be drilled in the Black Sea. The Company also owns
1,343,600 shares of the common stock of Penn Octane Corporation ("Penn Octane")
and 382,289 shares of common stock of Delta, both of which are public companies
traded on the Nasdaq exchange. Although the Company could sell a portion of its
holdings in these companies, if needed, both Penn Octane and Delta are thinly
capitalized and their stocks are not widely traded. Therefore, the Company could
have to sell its shares in these companies at a significant discount if it
liquidates more than a minimal portion of its holdings.

        Although closing of the Delta transaction is anticipated by April 30,
2002, it is possible that closing could be postponed because closing is subject
to approval of Delta's shareholders, a process requiring regulatory approval
(see Note 7 to the Consolidated Financial Statements). If closing were delayed
beyond April 30, 2002, the Company would still have available the potential
sources of cash listed above, but the Company's cash requirements could increase
if oil and gas prices decrease during the period of delay.

                                      -14-
<PAGE>

        The Company's liquidity and capital resources after April 30, 2002 or
any subsequent closing date for the Delta transaction depend upon whether the
Delta transaction actually closes. As noted above, both the Company and Delta
are subject to significant penalties for failure to close the planned
transaction under circumstances set forth in the definitive agreement between
the parties. If Delta fails to close under certain circumstances, Delta could be
required to issue to the Company 700,000 to 1,400,000 shares of Delta's common
stock as a penalty. Conversely, if the Company fails to close under certain
circumstances, the Company could be required to issue to Delta 700,000 shares of
the Company's common stock as a penalty. Despite these penalties either the
Company or Delta could decide not to close based upon changing oil and gas
prices, a reappraisal of the oil and gas properties being sold or retained,
litigation or other factors. In addition, Delta may fail to close because its
shareholders do not approve the transaction. As a result of the foregoing,
closing of the Delta transaction is not inevitable.

        If closing occurs, the Company would expect to receive net cash proceeds
of approximately $15,000-$15,500 (assuming an April 30, 2002 closing) in
addition to 9,566,000 shares of Delta's common stock. (Such stock would be
restricted but the Company has the right to cause Delta to file a registration
statement with respect to such shares 30 days after receipt of the shares by the
Company.) Such estimated proceeds represent the $20,000 cash portion of the
sales price to Delta effective October 1, 2001 less the estimated cash flow
applicable to the properties being sold from October 1, 2001, the effective
date, to closing. Obviously, if closing is accelerated or delayed or oil and gas
prices or production costs change significantly before closing, the estimated
cash flows will differ from the Company's estimate. In addition, as noted above,
if Delta pays a portion of the proceeds with a note, the cash proceeds received
by the Company at closing will be less.

        The Company's use of the cash and Delta stock proceeds to be received
would, in turn, depend upon whether the Company's directors decide to liquidate
or continue the business of the Company. In its Form 10-K for the year ended
September 30, 2001, the Company discussed several factors favoring liquidation
including the increasing regulatory and other costs of being a public company as
well as the difficulty in achieving a critical mass over which to apply the
Company's general and administrative expense burden. As a result of recent
concerns over public company reporting, the Company's management expects
regulatory burdens and costs will probably increase and could increase
geometrically. In addition, other recent factors favoring liquidation include
increased insurance costs (resulting primarily from the events of September 11,
2001) and the continued low prices currently being received for oil and gas
production. The Company's directors are currently evaluating alternatives for
the Company assuming closing does occur. Recommendation of any plan of
liquidation, however, would depend upon the financial and legal situation of the
Company when such a decision is made, the estimated income tax consequences to
the Company and other factors. A decision to liquidate would be subject to
approval by the Company's stockholders.

        If, on the other hand, the Delta transaction closes and the Company
decides not to liquidate, the Company would own approximately 43% of Delta and
would expect to receive approximately $15,000-$15,500 of cash proceeds at
closing (although a portion of such cash proceeds may be paid through a note, as
discussed above). In such case, the Company would also have to replace the
letter of credit related to the Long Trusts lawsuit, as described in Note 4 to
the Consolidated Financial Statements. At that point the Company could seek
acquisitions in the energy industry but would probably have to liquidate some or
a portion of its holdings of Delta common stock to make a significant
acquisition in excess of $15,000 since the Company would then have no collateral
to support a loan from its lender. Although many analysts believe it may be
possible to acquire oil and gas properties at favorable prices at the present
time or in the near future due to low oil and gas prices, there can be no
assurance that such will be the case. Many energy companies have more financial
resources than the Company and could easily outbid the Company in such an
acquisition scenario.

        If the Delta transaction does not close as planned and the Company's
directors decide to continue operations, the Company may decide to undertake new
drilling activities and would also expect to have available its $40,000 line of
credit from its energy lender. Such line is currently unused except for the
$3,886 letter of credit provided for the bond related to the Long Trusts'
litigation (see Note 4 to the Consolidated Financial Statements). The Company
estimates that it would be able to draw at least $10,000 based upon its current
reserves and current oil and gas pricing, in addition to the $3,886 letter of
credit already outstanding, but there can be no assurance that such would be the
case.

        If the Company ends up continuing current exploration and production
operations (either because the Delta transaction did not close or the Delta
transaction closed but the Company decided not to liquidate) the Company would
continue to be subject to the following risk factors:

                                      -15-
<PAGE>

        a.   Contingent environmental liabilities (see Note 4 to the
             Consolidated Financial Statements).

        b.   Reserve price risk - the effect of price changes on the Company's
             unhedged oil and gas production.

        c.   Exploration and development reserve risk - the effect of not
             finding the oil and gas reserves sought during new drilling.

        d.   Reserve risk - the effect of differences between estimated and
             actual reserves and production for existing wells (see below).

        e.   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.

        f.   Foreign operation risks - the possibility that the Company's costs
             to participate in the drilling of and, if successful, production
             from the wildcat well planned for the Black Sea will significantly
             exceed those estimated by the Company due to foreign political,
             operating and insurance risks.

        g.   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. (See Note 4 to the Consolidated Financial
             Statements.)

CRITICAL ACCOUNTING POLICIES:

        Full Cost Method of Accounting for Oil and Gas Properties

        The Company accounts for its oil and gas properties using the full cost
method. Under this method, the Company is required to record a permanent
impairment provision if the net book value of its oil and gas properties less
related deferred taxes exceeds a ceiling value equal to the present value of
future cash inflows from proved reserves, tax effected and discounted at 10%.
The ceiling test is computed at the end of each quarter. The oil and gas prices
used in calculating such future cash inflows are based upon the market price on
the last day of the accounting period. Due to the volatility of oil and gas
prices, the oil and gas prices used in the ceiling computation have
significantly differed from the actual prices the Company ultimately receives
for its production. If the market prices on the last day of the Company's
quarterly reporting period are low, it is possible that the Company will be
required to record an impairment provision related to its oil and gas
properties. If such market prices subsequently increase, the Company would not
reverse any impairment provisions previously recorded. Instead, the Company
would record lower depletion expense in the future since any prior ceiling
impairment provisions would have reduced the net book value of the Company's oil
and gas properties and would thus reduce the depletion cost per mcfe of natural
produced thereafter.

        The Company's oil and gas properties' book valuation is also subject to
reserve risk - the effect of differences between estimated and actual reserves
and production from existing wells.

        Discontinued Refining Operations

        At December 31, 2001, the Company had recorded net refining liabilities
retained of $3,016 and an estimated value of discontinued net refining assets of
$612, resulting in a net recorded liability of $2,404. As noted in Note 4 to the
Consolidated Financial Statements, Texaco has made a claim against the Company
for future environmental costs that have been estimated at $80,000-$150,000. 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 believe that Texaco's claims are utterly
without merit, the Company would be required to record additional environmental
liabilities if it becomes probable that the Company's liabilities related to
Texaco's claims or other environmental liabilities are probable and exceed
$2,404. As noted above, if such probable liabilities exceeded the value of the
Company's assets, the Company would not have the financial capability to pay
such liabilities.

                                      -16-
<PAGE>

        Valuation of Certain Marketable Equity Securities

        The Company currently classifies its investment securities as
available-for-sale securities. Pursuant to SFAS No. 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. However, in accordance with SFAS No. 115 a decline in
fair market value below cost that is other than temporary is accounted for as a
realized loss.

        The Company currently owns 382,289 shares of the common stock of Delta
and expects to receive 9,566,000 additional shares of Delta's common stock when
and if the Delta transaction closes. The Company's per share cost for the
382,289 Delta shares currently owned is approximately $5.06/share. Pursuant to
current generally accepted accounting principles, the Company may be required to
write down its current investment in Delta stock to the current market value of
such stock as a charge to operations if such market value remains lower than the
Company's cost for a period of 6-9 consecutive months. As of December 31, 2001,
the market value per share of Delta's common stock had been less than the
Company's cost per share for a period of approximately five to six months.
Although any market write downs are charged to operations, any subsequent
increases in the market value after a market write down are recorded as a
component of other comprehensive income - not a component of current operations.
The same accounting principles would also apply to the 9,566,000 shares of
Delta's common stock the Company expects to receive from the Delta transaction.

        Valuation Allowance for Deferred Income Tax Asset

        At December 31, 2001, the Company has recorded a valuation allowance
offsetting its gross deferred tax asset based upon the tax carryforwards it
expects to realize from the Delta transaction. If the Delta transaction does not
close as planned, it is probable that the Company will increase its valuation
allowance (and thereby decrease its net deferred tax asset and net income) based
upon its expected future taxable income. Such future expected taxable income
would, in turn, depend upon many factors - especially future oil and gas prices
and projected production. If the Delta transaction closes as planned, the future
taxable income expected by the Company will depend, to a large degree, upon the
valuation of the Delta stock to be received at closing and the valuation
allowance can be expected to increase or decrease based upon the value of the
actual consideration received at closing. Such value may differ from that
estimated by the Company.

Item 3. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK

        The Company has not hedged its remaining expected crude oil and 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.

                                      -17-
<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,
2001. Also see Note 4 to the December 31, 2001 financial statements included in
Part I.

Item 6. Exhibits and Reports on Form 8-K

        (A) Exhibits:
               Exhibit 10.144 -  Purchase and Sale Agreement between Castle
                                 Energy Corporation and Delta Petroleum Company,
                                 executed January 15, 2002
               Exhibit 11.1 -    Statement re: Computation of Earnings Per Share

        (B) Reports on Form 8-K: None

























                                      -18-
<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:      February 13, 2002            CASTLE ENERGY CORPORATION
              -------------------------



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


























                                      -19-