<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, 1998
                               ------------------------

                                      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 Identification No.)
of Incorporation or Organization)          


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

                          Radnor, Pennsylvania 19087
                      ---------------------------------
                                             (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)

         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: 3,544,029 shares of
Common Stock, $.50 par value outstanding as of April 30, 1998.



<PAGE>


                           CASTLE ENERGY CORPORATION


                                     INDEX

<TABLE>
<CAPTION>

                                                                                                      Page #
                                                                                                     ------  
Part I.      Financial Information
<S>          <C>          <C>                                                                           <C>
             Item 1.      Financial Statements:

                          Consolidated Balance Sheets - March 31, 1998 (Unaudited)
                          and September 30, 1997....................................................... 1

       
                          Consolidated Statements of Operations - Three Months
                          Ended March 31, 1998 and 1997 (Unaudited).................................... 2

                          Consolidated Statements of Operations - Six Months Ended
                          March 31, 1998 and 1997 (Unaudited).......................................... 3
                                                         
                          Consolidated Statements of Cash Flows - Six Months Ended
                          March 31, 1998 and 1997 (Unaudited).......................................... 4

                          Consolidated Statements of Stockholders' Equity - Year
                          Ended September 30, 1997 and Six Months Ended March
                          31, 1998 (Unaudited)......................................................... 5

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

             Item 2.      Management's Discussion and Analysis of Financial
                          Condition and Results of Operations..........................................10

Part II.     Other Information

             Item 1.      Legal Proceedings............................................................19

             Item 6.      Exhibits and Reports on Form 8-K.............................................19

Signature    ..........................................................................................20

</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,
                                                                                           1998                1997
                                                                                      ------------         -------------
                                    ASSETS                                            (Unaudited)
<S>                                                                                      <C>                  <C>

Current assets:
    Cash and cash equivalents.................................................            $37,090              $36,338
    Restricted cash...........................................................                600                  497
    Accounts receivable.......................................................              7,764                5,868
    Prepaid transportation, net...............................................              1,500                1,500
    Prepaid expenses and other current assets.................................                400                  452
    Deferred income taxes.....................................................                883                2,239
    Note receivable - Penn Octane Corporation.................................              1,000
    Note receivable - MG......................................................                                  10,000
   Estimated realizable value of discontinued net refining assets.............              4,422                4,422
                                                                                          -------             --------
      Total current assets....................................................             53,659               61,316
Property, plant and equipment, net:
    Furniture, fixtures and equipment.........................................                152                  180
Oil and gas properties, net (full cost method)................................              3,700                2,818
Gas contracts, net............................................................             11,015               15,747
Prepaid transportation, net...................................................                302                1,162
Deferred income taxes.........................................................                                   1,494
Other.........................................................................                 75
                                                                                          -------              -------
      Total assets............................................................            $68,903              $82,717
                                                                                          =======              =======

                     LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
    Dividend payable..........................................................            $   528              $   707
    Accounts payable..........................................................              7,134                5,615
    Accrued expenses..........................................................              1,153                1,257
   Net refining liabilities retained..........................................              5,927                7,353
                                                                                          -------              -------
      Total current liabilities...............................................             14,742               14,932
Long-term liabilities.........................................................                                      20
                                                                                          -------              -------
      Total liabilities.......................................................             14,742               14,952
                                                                                          -------              -------
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; 6,800,646
      shares issued at March 31, 1998 and 6,798,646 shares
      issued at September 30, 1997............................................              3,400                3,399
    Additional paid-in capital................................................             67,080               67,061
    Retained earnings.........................................................             26,599               22,468
                                                                                          -------              -------
                                                                                           97,079               92,928
      Treasury stock at cost - 3,254,617 shares at March 31, 1998 and
      2,085,100 shares at September 30, 1997                                              (42,918)             (25,163)
                                                                                          -------              -------
         Total stockholders' equity ..........................................             54,161               67,765
                                                                                          -------              -------
         Total liabilities and stockholders' equity...........................            $68,903              $82,717
                                                                                          =======              =======
</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,
                                                                                      ---------------------------------  
                                                                                        1998                  1997
                                                                                        ----                  ----
<S>                                                                                   <C>                     <C>

Revenues:
    Natural gas marketing and transmission:
      Gas sales..........................................................             $  17,885              $  20,367
                                                                                      ---------              --------- 
                                                                                         17,885                 20,367
                                                                                      ---------              ---------
    Exploration and production:
      Oil and gas sales..................................................                   562                  2,682
      Well operations....................................................                    57                    129
                                                                                      ---------              ---------
                                                                                            619                  2,811
                                                                                      ---------              ---------           
                                                                                         18,504                 23,178
                                                                                      ---------              ---------
Expenses:
    Natural gas marketing and transmission:
      Gas purchases......................................................                11,113                 12,832
      Transportation.....................................................                   400
      Operating costs (recovery).........................................                   (16)                   129
      General and administrative.........................................                    12                    373
      Depreciation and amortization......................................                 2,366                  2,779
                                                                                      ---------              ---------
                                                                                         13,875                 16,113
                                                                                      ---------              ---------
    Exploration and production:
      Oil and gas production.............................................                   183                    717
      General and administrative.........................................                    85                    403
      Depreciation, depletion and amortization...........................                   164                    405
                                                                                      ---------              ---------
                                                                                            432                  1,525
                                                                                      ---------              ---------
    Corporate general and administrative expenses........................                   828                    639
                                                                                      ---------              ---------
                                                                                         15,135                 18,277
                                                                                      ---------              ---------
Operating income.........................................................                 3,369                  4,901
                                                                                      ---------              ---------

Other income (expense):
    Interest income......................................................                   594                    210
    Other income (expense)...............................................                     8                    (11)
    Interest expense.....................................................                                         (554)
                                                                                      ---------              ---------
                                                                                            602                  (355)
                                                                                      ---------              ---------
Net income before provision for income taxes.............................                 3,971                  4,546
                                                                                      ---------              ---------
 Provision for income taxes:
    State................................................................                    40                     45
    Federal..............................................................                 1,389                  1,591
                                                                                      ---------              ---------
                                                                                          1,429                  1,636
                                                                                      ---------              ---------
Net income...............................................................             $   2,542              $   2,910
                                                                                      =========              =========

Net income per share:
    Basic................................................................             $     .61              $     .50
                                                                                      =========              =========
    Diluted..............................................................             $     .61              $     .50
                                                                                      =========             ==========

 Weighted average number of common and potential dilutive common shares
    outstanding:
       Basic.............................................................             4,144,129              5,778,228
                                                                                     ==========              =========
       Diluted...........................................................             4,181,244              5,820,232
                                                                                     ==========              =========

</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,
                                                                                      ------------------------------
                                                                                       1998                    1997
                                                                                       ----                    ----
<S>                                                                                 <C>                   <C>         
Revenues:
    Natural gas marketing and transmission:
      Gas sales..........................................................           $    38,148           $     38,792
                                                                                    -----------           ------------
                                                                                         38,148                 38,792
                                                                                    -----------           ------------
    Exploration and production:
      Oil and gas sales..................................................                 1,220                  4,776
      Well operations....................................................                   115                    235
                                                                                    -----------           ------------
                                                                                          1,335                  5,011
                                                                                    -----------           ------------
                                                                                         39,483                 43,803
                                                                                    -----------           ------------
Expenses:
    Natural gas marketing and transmission:
      Gas purchases......................................................                24,199                 24,075
      Transportation.....................................................                   860
      Operating costs....................................................                   (16)                   368
      General and administrative.........................................                    38                    677
      Depreciation and amortization......................................                 4,731                  5,684
                                                                                    -----------           ------------
                                                                                         29,812                 30,804
                                                                                    -----------           ------------
    Exploration and production:
      Oil and gas production.............................................                   348                  1,294
      General and administrative.........................................                   307                    615
      Depreciation, depletion and amortization...........................                   327                    899
                                                                                    -----------           ------------
                                                                                            982                  2,808
                                                                                    -----------           ------------
    Corporate general and administrative expenses........................                 1,568                  1,782
                                                                                    -----------           ------------
                                                                                         32,362                 35,394
                                                                                    -----------           ------------
Operating income.........................................................                 7,121                  8,409
                                                                                    -----------           ------------

Other income (expense):
    Interest income......................................................                 1,231                    435
    Other income (expense)...............................................                    29                    (51)
    Interest expense.....................................................                                         (753)
                                                                                    -----------           ------------
                                                                                          1,260                   (369)
                                                                                    -----------           ------------
Net income before provision for income taxes.............................                 8,381                  8,040
                                                                                    -----------           ------------
Provision for income taxes:
    State................................................................                    84                     80
    Federal..............................................................                 2,933                  2,814
                                                                                    -----------           ------------
                                                                                          3,017                  2,894
                                                                                    -----------           ------------
Net income...............................................................           $     5,364           $      5,146
                                                                                    ===========           ============

Net income per share:
    Basic................................................................           $      1.21           $        .80
                                                                                    ===========           ============
    Diluted..............................................................           $      1.20           $        .80
                                                                                    ===========           ============

Weighted average number of common and potential dilutive
    common shares outstanding:
        Basic............................................................             4,434,363              6,397,746
                                                                                    ===========            ===========
        Diluted..........................................................             4,465,767              6,429,848
                                                                                    ===========            ===========
</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,
                                                                                      -------------------------------
                                                                                         1998                   1997
                                                                                         ----                   ----
<S>                                                                                      <C>                   <C>

 Net cash flow provided by operating activities..........................               $22,110                $13,900
                                                                                        -------                -------

Cash flows from investing activities:
    Investment in pipelines..............................................                                           (9)
    Investment in oil and gas properties.................................                (1,209)                  (225)
    Investment in note receivable - Penn Octane Corporation..............                (1,000)
                                                                                        -------                -------
         Net cash used in investing activities...........................                (2,209)                  (234)
                                                                                        -------                -------

Cash flows from financing activities:
    Proceeds of long-term debt............................................                                       13,986
    Repayment of long-term debt...........................................                                      (11,835)
    Dividends paid to stockholders........................................                (1,414)
    Acquisition of treasury stock.........................................               (17,755)               (14,063)
    Proceeds from exercise of stock options...............................                    20                     87
                                                                                        -------                -------
         Net cash provided by (used in) financing activities.............               (19,149)               (11,825)
                                                                                        -------                -------
Net increase (decrease) in cash and cash equivalents.....................                   752                  1,841
Cash and cash equivalents - beginning of period..........................                36,338                  3,457
                                                                                        -------                -------
Cash and cash equivalents - end of period................................               $37,090                $ 5,298
                                                                                        =======                =======
</TABLE>

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

                                      -4-
<PAGE>







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

<TABLE>
<CAPTION>


                                            Common Stock       Additional    Retained          Treasury Stock
                                       ---------------------    Paid-In      Earnings        ---------------------
                                       Shares      Amount       Capital      (Deficit)       Shares         Amount        Total
                                       ------      ------      ----------    -----------     ------         ------      ---------
<S>                                     <C>         <C>           <C>           <C>           <C>            <C>           <C>

Balance - October 1, 1996.........   6,693,646     $3,347       $66,316       ($2,952)                                   $66,711
Stock acquired....................                                                         2,085,100      ($25,163)      (25,163)
Options exercised.................     105,000         52           745                                                      797
Dividends.........................                                             (1,446)                                    (1,446)
Net income........................                                             26,866                                     26,866
                                     ---------     ------       -------       -------      ---------      --------       -------
Balance - September 30, 1997......   6,798,646      3,399        67,061        22,468      2,085,100       (25,163)       67,765
Stock acquired....................                                                         1,169,517       (17,755)      (17,755)
Options exercised.................       2,000          1            19                                                       20
Dividends declared................                                             (1,233)                                    (1,233)
Net income........................                                              5,364                                      5,364
                                     ---------     ------       -------       -------      ---------      --------       -------
Balance - March 31, 1998             6,800,646     $3,400       $67,080       $26,599      3,254,617      $(42,918)      $54,161
                                     =========     ======       =======       =======      =========      =========      ======= 
</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 the six month periods ended March 31, 1998 are not
necessarily indicative of the results that may be expected for the fiscal year
ending September 30, 1998 or for 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, 1997.

         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 and six month periods ended March 31, 1998
and 1997 and for a fair statement of financial position at March 31, 1998 and
1997.

Note 2 - September 30, 1997 Balance Sheet

         The amounts presented in the balance sheet as of September 30, 1997
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, 1997.

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. In
addition, Powerine Oil Company ("Powerine"), one of the Company's refining
subsidiaries, merged into a subsidiary of the purchaser and is no longer a
subsidiary of the Company. The Company's other refining subsidiaries own no
refining assets and are in the process of liquidation. As a result, the
Company has accounted for its refining operations as discontinued operations.

Note 4 - Contingencies/Litigation

         Powerine Arbitration

         In October 1997, the Company recovered $8,700 from the Powerine
Arbitration. The Company believes it is entitled to an additional $2,142 plus
interest and its special legal counsel presented arguments to the arbitrator
to recover this amount. On January 27, 1998, the arbitrator ruled against

                                      -6-

<PAGE>


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


the Company. The Company is currently pursuing other alternatives to recover
the $2,142. Reference should be made to the Company's Form 10-Q for the
quarter ended December 31, 1997 and to Item 3 of the Company's Annual Report
on Form 10-K for the year ended September 30, 1997.

         SWAP Agreement - MGNG

         In January 1998, IRLP filed suit against MG Natural Gas, Inc.
("MGNG"), a subsidiary of Metallgesellschaft Corp. ("MG"), to collect $703
plus interest. In February 1998, MGNG contended that the $703 was never owed
to IRLP and that it had liquidated the subsidiary owing the $703. Management
and general counsel believe that MGNG's counterclaims are not supported by the
facts and do not affect the merits of IRLP's claims, which IRLP intends to
pursue vigorously. Reference should be made to the Company's Form 10-Q for the
quarter ended December 31, 1997 and to Item 3 of the Company's Annual Report
on Form 10-K for the year ended September 30, 1997.

         Larry Long Litigation

         There have been no significant developments since September 30, 1997.
Reference should be made to Form 10-Q for the quarter ended December 31, 1997
and to the Company's Annual Report on Form 10-K for the year ended September
30, 1997.

         MGNG Litigation

         On May 4, 1998, a subsidiary of the Company filed a lawsuit against
MGNG and MG Gathering Company, another subsidiary of MG, in the district court
of Harris County, Texas. The Castle subsidiary seeks to recover gas
measurement and transportation expenses charged by the defendants in breach of
a certain gas purchase contract. Improper charges total approximately $750,000
before factoring in interest. This litigation is in a very preliminary stage:
Defendants have not answered and discovery has not commenced.

         Powerine Class Action Lawsuit

         In July 1996, Powerine was served with a suit concerning operations
of the Powerine Refinery in the Superior Court of the State of California in
Los Angeles, California. The suit claims the Powerine Refinery is a public
nuisance, that it has released excessive toxic and noxious emissions and
caused physical and emotional distress and property damage to residents living
nearby. The Company was also named as a defendant in the suit. In March 1997,
the Company was served with the lawsuit.

         In April 1997, the Company filed a motion to quash the plaintiffs'
summons based upon the lack of jurisdiction. On May 2, 1997, the court granted
the Company's motion. As a result, the Company is no longer a defendant in the
Powerine Class Action Lawsuit.

                                     -7-
                                                     
<PAGE>


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



Note 5 - GAMXX Agreement

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

         Pursuant to the terms of the GAMXX Agreement, the Company is to
receive $1,000 cash in settlement for its loans when GAMXX closes on its
financing. GAMXX expects such closing not later than May 31, 1998.

         The Company has carried its loan to GAMXX at zero the last six years.
The Company will record the $1,000 proceeds as "other income" if and when it
collects such amount. There can be no assurance that GAMXX will close on its
financing.

Note 6 - Accounting Pronouncements

         In February 1997, FASB issued SFAS No. 128, "Earnings Per Share,"
("FAS No.128") which establishes standards for computing and presenting
earnings per share ("EPS") for entities with publicly held common stock. SFAS
No. 128 simplifies the standards for computing EPS previously found in
Accounting Principles Board Opinion No. 15, "Earnings Per Share," and makes
them comparable to international EPS standards. It replaces the presentation
of primary EPS with a presentation of basic EPS, and requires dual
presentations of basic and diluted EPS on the face of the income statement.
SFAS No. 128 is effective for fiscal years ending after December 15, 1997, and
early adoption is not permitted. The Company adopted FAS 128 effective October
1, 1997. Earnings per share for the three and six month periods ended March
31, 1998 have been stated in accordance with FAS No. 128 and earnings per
share for the three and six month periods ended March 31, 1997 have been
restated in accordance with FAS No. 128.

Note 7 - Derivative Financial Instruments

         The Company utilizes derivative financial instruments to reduce its
exposure to changes in the market price of natural gas. Commodity derivatives
utilized as hedges of natural gas are futures contracts. Natural gas basis
swaps are sometimes used to hedge the basis differential between the
derivative financial instrument index price and the natural gas field price.
In order to qualify as a hedge, price movements in the underlying commodity
derivative must be highly correlated with the hedged commodity.

                                     -8-

<PAGE>


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

         Gains and losses on futures contracts that qualify as a hedge of
firmly committed or anticipated purchases and sales of natural gas are
deferred on the balance sheet and credited or debited to cost of gas purchased
and recognized in operations when the related hedged transaction occurs. Gains
or losses on derivative financial instruments that do not qualify as a hedge
are recognized in income currently. There were no such deferred gains or
losses at March 31, 1998 or September 30, 1997.

         As a result of hedging transactions, the cost of gas purchased
increased $340 for the six months ended March 31, 1998 and decreased $485 for
the six months ended March 31, 1997

Note 8 - Subsequent Events

         Subsequent to March 31, 1998, the Company repurchased 5,000 shares of
its outstanding common stock. The purchase price was $80 ($16.00 per share).

         Subsequent to March 31, 1998, an option holder exercised options to
purchase 3,000 shares of the Company's common stock.

                                      -9-

<PAGE>




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. As a result, management's discussion and
analysis focus primarily on the Company's continuing operations -- natural gas
marketing and exploration and production. All references herein to dollars are
in thousands.

         In May 1997, the Company sold approximately 84% of its proved oil and
gas reserves and its Texas pipeline to Union Pacific Resources Company
("UPRC") and one of its subsidiaries. As a result, the operations related to
the assets sold impacted operations for all of the three and six month periods
ended March 31, 1997 but did not impact operations for the three month and six
month periods ended March 31, 1998.

         The Company desires to take advantage of the safe harbor provisions
of the Private Securities Litigation Reform Act of 1995 and has included a
discussion of risk factors related to Management's Discussion and Analysis of
Financial Condition and Results of Operations. The discussion and analysis
below include forward-looking data that are based upon management's estimates,
assumptions and projections. Important factors such as the risk factors listed
below and other factors could cause results to differ materially from those
expected by management.

NATURAL GAS MARKETING

         As noted above, the Company sold its Texas oil and gas properties and
pipeline to UPRC in May of 1997 while retaining its gas marketing operations
which consist primarily of a long-term gas sales contract ("Lone Star Gas
Contract") with Lone Star Gas Company ("Lone Star"). The sale had the
following effects on the Company's natural gas marketing operations:

         a.   The Company now has to purchase gas for the Lone Star Contract
              that previously was produced from the Company's Texas oil and
              gas properties. As a result, the Company became subject to price
              risk on such future gas purchases whereas previously the Company
              was subject to reserve production risk - the possibility that
              the volumes of gas produced were more or less than those
              expected. Previously, the Company's marketing subsidiary
              purchased a portion of the gas required for the Lone Star
              Contract from one of the Company's exploration and production
              subsidiaries. The resultant intercompany sales were eliminated
              in consolidation. Since the sale to UPRC, the Company's gas
              marketing subsidiary has purchased all gas required for the Lone
              Star Contract from unrelated parties.

         b.   Having sold its Texas pipeline, the Company now requires outside
              transportation to transport its gas to Lone Star. A subsidiary
              of UPRC, the purchaser of the Company's Texas pipeline, agreed
              to transport all of the remaining Lone Star gas as part of the
              related purchase and sale agreement. The Company has recorded
              the value of such prepaid transportation at $3,000, its
              estimated fair market value, and is amortizing the prepayment
              over the term of the Lone Star Contract based upon deliveries
              made. Previously, the Company incurred operating expenses to
              operate the pipeline and recorded pipeline depreciation.

                                     -10-
              
<PAGE>



         Gross Margin

         A comparison of the gross margins earned by the Company's natural gas
marketing segment is as follows:

<TABLE>
<CAPTION>

                                                Lone Star          MGNG           Intercompany
                                                Contract         Contract         Eliminations         Consolidated
                                                --------         --------         ------------         ------------ 
Six Months Ended March 31, 1998:
<S>                                             <C>              <C>              <C>                  <C>>

   Gas Sales                                    $35,690           $2,458                                 $38,148
   Gas purchases                                (20,886)          (3,313)                                (24,199)
                                                -------          -------                                 -------
   Gross margin                                 $14,804           $ (855)                                $13,949
                                                =======          =======                                 =======

Six Months Ended March 31, 1997:

   Gas Sales                                    $39,241           $2,445           ($2,894)              $38,792
   Gas purchases                                (24,065)          (2,904)            2,894               (24,075)
                                                -------           ------            ------               -------
   Gross margin                                 $15,176           ($ 459)                                $14,717
                                                =======           ======            ======               =======
</TABLE>

         Natural gas sales under the Lone Star Contract decreased $3,551 or
9.0% from the first six months of fiscal 1997 to the first six months of fiscal
1998. Under the Lone Star Contract the price received for gas is fixed through
May 31, 1999. The variance in gas sales, therefore, is almost entirely
attributable to the volumes of gas delivered. Although the volumes delivered
to Lone Star annually are essentially fixed (the Lone Star Contract has a
take-or-pay provision), the Lone Star Contract year is from February 1 to
January 31 whereas the Company's fiscal year is from October 1 to September
30. Furthermore, although the volumes to be taken by Lone Star in a given
contract year are fixed, there is no provision requiring fixed monthly or
daily volumes and deliveries accordingly vary with Lone Star's seasonal and
peak demands. Such variances have been significant. As a result, Lone Star
deliveries, although fixed for a contract year, may be skewed and not
proportional for the Company's fiscal periods.

         For the first six months of fiscal 1998 deliveries and sales to Lone
Star exceeded by approximately 6.5% those which would have resulted if daily
deliveries had been fixed and equal. Since annual deliveries and sales have
historically approximated the annual volumes Lone Star is required to take
under the Lone Star Contract, it is expected that deliveries and sales for the
remainder of fiscal 1998 will average less than those which would have
resulted if daily deliveries were fixed and equal.

         Gas purchases for the Lone Star Contract decreased $3,179 or 13.2%
from the first six months of fiscal 1997 to the first six months of fiscal
1998. For the six months ended March 31, 1997 gas purchases comprised 61.3% of
gas sales versus 58.5% of gas sales for the six months ended March 31, 1998.
From 1997 to 1998 the gross margin decreased $372 or 2.5%. During the same
periods the gross margin percentage ((gas sales - gas purchases) as a
percentage of gas sales) increased 2.8% from 38.7% for the six months ended
March 31, 1997 to 41.5% for the six months ended March 31, 1998. The decrease
in gas purchases as a percentage of gas sales and related increase in the
gross margin percentage resulted primarily from a non-recurring favorable
adjustment of gas purchase costs ($517), the replacement of high price
contracts expiring in April 1997 with market price contracts and from lower
market prices in fiscal 1998. The Company acquires approximately 90% of the

                                     -11-

<PAGE>


gas required for the Lone Star Contract pursuant to a fixed price gas sales
contract with MGNG ("MG Contract"). As a result the changes in the periods
being compared relate to factors affecting the 10% of gas supplies that the
Company must acquire on the open market at market prices. Most of this 10%
requirement remains unhedged. Therefore, the Company is subject to gas price
risk with respect thereto.

         MGNG Contract

         One of the Company's natural gas marketing subsidiaries is a party to
the MG Contract. Pursuant to the terms of the contract, the subsidiary is
required to sell to MGNG 7,356 MMBtu's (British thermal units) of natural gas
at a fixed price ratably over the period from June 1, 1996 to May 31, 1999.
The fixed price for the gas sold to MGNG is significantly less than the fixed
price of gas sold to Lone Star. For the six months ended March 31, 1998, the
Company realized a negative gross margin of $855 versus a negative gross
margin of $459 for the six months ending March 31, 1997. The negative margins
resulted because the spot (market) prices paid by the Company for gas, net of
hedging effects where applicable, exceeded the fixed price received by the
Company from MGNG under the contract. The higher negative gross margins for
the six months ended March 31, 1998 resulted because the spot prices paid by
the Company, net of hedging effects, were greater in fiscal 1998 than in
fiscal 1997. The Company has not yet hedged most of the remaining gas supply
requirement for this contract. In addition, the Company expects to realize a
significant negative gross margin on this contract for the remainder of fiscal
1998 given relatively high gas prices. Future gross margins will, however,
depend primarily on future spot (market) prices of gas and the results of the
Company's efforts to hedge its remaining gas purchase commitments at favorable
prices.

         Operating Costs

         Operating costs decreased to a credit of $16 for the six months ended
March 31, 1998 from $368 for the six months ended March 31, 1997 because the
Texas pipeline was sold to UPRC in May 1997 and the Company no longer incurs
operating costs to operate the Texas pipeline.

         General and Administrative

         General and administrative costs decreased $639 from $677 for the six
months ended March 31, 1997 to $38 for the six months ended March 31, 1998.
Most general and administrative costs incurred during the six months ended
March 31, 1997 related to the Texas pipeline, which was sold in May 1997. The
remaining administrative costs consist primarily of consulting fees for
on-going gas marketing operations.

         Transportation

         Transportation expense increased $860 from zero for the six months
ended March 31, 1997 to $860 for the six months ended March 31, 1998. In 1997,
one of the Company's subsidiaries owned and operated the Texas pipeline and
all transportation revenues were for intercompany transportation and were
accordingly eliminated in consolidation of the Company's financial statements.
In 1998, transportation expense consisted entirely of the amortization of a
$3,000 prepaid transportation asset. Amortization is based upon and thus
proportional to deliveries made to Lone Star.

                                     -12-

<PAGE>




         Depreciation and Amortization

         Depreciation and amortization decreased $953 or 16.8% from the first
six months of fiscal 1997 to the first six months of fiscal 1998. The decrease
is attributable to the sale of the Texas pipeline to UPRC in May 1997. As a
result of the sale, the Company no longer owned and depreciated the Texas
pipeline.

EXPLORATION AND PRODUCTION

         As noted above, the Company sold its Texas oil and gas properties to
UPRC in May 1997. The reserves sold represented approximately 84% of the
Company's proved oil and gas reserves and 60%- 65% of the Company's gas
production at the time of sale. Comparison of current oil and gas sales,
production costs, general and administrative costs and depletion, depreciation
and amortization to those in fiscal 1997 is thus not meaningful. Accordingly,
exploration and production operations comparisons and analysis have been
limited to those oil and gas properties which were not sold to UPRC. The
related operating results for such properties are as follows:

<TABLE>
<CAPTION>

                                                                             Six Months Ended March 31,
                                                                         --------------------------------
                                                                           1998                    1997
                                                                           ----                    ----
<S>                                                                       <C>                     <C>   
Revenues:
     Oil and gas sales...........................................         $1,220                  $1,728
     Well operations.............................................            115                     170
                                                                         -------                 -------
                                                                           1,335                   1,898
                                                                         -------                 -------

Expenses:
     Oil and gas production......................................            248                     192
     General and administrative..................................            407                     461
     Depreciation, depletion and amortization....................            327                     429
                                                                         -------                 -------
                                                                             982                   1,082
                                                                         -------                 -------
Operating income.................................................        $   353                 $   816
                                                                         =======                 =======
</TABLE>

         Revenues

         Oil and Gas Sales

         Oil and gas sales decreased $508 or 29.4% from the first six months
of fiscal 1997 to the first six months of fiscal 1998. The decrease is
attributable to decreased oil and gas prices and decreased production.
Although the Company has participated in drilling approximately twenty-four
new wells from July 1997 through March 31, 1998, production from such new
drilling activities has only recently begun impacting operations. The Company
is currently participating in two drilling programs and expects to participate
in at least 11-16 additional, new wells in fiscal 1998. The Company is also
reviewing possible investments in other oil and gas drilling programs and oil
and gas property acquisitions. As a result, the Company expects that its oil
and gas sales will eventually increase given stable or increasing oil and gas
sales prices but there can be no assurance that wells expected to be drilled
will actually be drilled or that oil and gas sales will increase.

                                     -13-
         
<PAGE>



         Well Operations

         Revenue from well operations decreased $55 or 32.4% from the first
six months of fiscal 1997 to the first six months of fiscal 1998. The decrease
is attributable to the Company's resignation as operator on certain
Appalachian wells where a non-operator offered to operate the wells at a cost
significantly less than that being incurred by the Company in performing such
operations. The related well operations revenues were not replaced.

         Expenses

         Oil and Gas Production

         Oil and gas production expenses increased $56 or 29.2% from the first
six months of fiscal 1997 to the first six months of fiscal 1998. The increase
in oil and gas production expenses results from the general maturing of the
Company's oil and gas properties and the tendency for older, depleting
properties to carry a higher production expense burden than recently drilled
properties. Furthermore, oil and gas production expenses, especially
non-capitalized repairs, do not generally occur evenly throughout the year and
are best compared on an annual rather than on a quarterly basis. The Company
expects that, although oil and gas production expense will increase as a
result of its new drilling activities, such expenses will decline when
compared to oil and gas sales given the lower production costs typically
associated with new production. There can be no assurance, however, that such
will be the case.

         General and Administrative

         General and administrative costs decreased $54 or 11.7% from the
first six months of fiscal 1997 to the first six months of fiscal 1998. The
net decrease was attributable to lower insurance costs, tax refunds and vendor
settlements in fiscal 1998 for which there was no counterpart in fiscal 1997.
This was offset slightly by higher employee costs in fiscal 1998.

         Depreciation, Depletion and Amortization

         Depreciation, depletion and amortization decreased $102 or 23.8% from
the first six months of fiscal 1997 to the first six months of fiscal 1998.
The decrease is attributable to decreased production and to a decrease in the
cost per equivalent mcf of proved reserves in the Company's full cost
amortization center. The decrease in the cost per equivalent mcf in the
Company's full cost amortization center resulted from the sale of 84% of the
Company's oil and gas reserves to UPRC in May of 1997. The consequence will be
a decrease in future depreciation, depletion and amortization charges per unit
to the Company's exploration and production operations.

OTHER INCOME (EXPENSE)

         Interest Income

         Interest income increased $786 or 183.0% from the first six months of
fiscal 1997 to the first six months of fiscal 1998. The increase is primarily
attributable to an increase in unrestricted cash. At March 31, 1998, the
Company had $37,090 of unrestricted cash versus only $5,298 a year earlier.
For the six months ended March 31, 1997, $400 of interest income was
attributable to a note receivable from MG related to the Powerine Arbitration
and $35 resulted from the investment of excess cash.

                                     -14-
<PAGE>



For the six months ended March 31, 1998 $31 was attributable to interest on the
MG note, $44 was attributable to interest on a note from Penn Octane Corporation
("Penn Octane") and the remaining $1,156 was attributable to the investment of
excess cash. Interest on the MG note ceased on October 14, 1997.

         The Penn Octane note, in the principal amount of $1,000, is
unsecured, bears interest at 10% and is due the earlier of June 30, 1998 or
the closing of any financing by Penn Octane in excess of $5,000. The Company
expected Penn Octane to close such a financing in January 1998 but it has not
yet been able to do so. Penn Octane has, however, paid interest due on the
note when scheduled. The Company will continue to monitor its investment in
Penn Octane.

         Interest Expense

         Interest expense decreased $753 from $753 for the six month period
ended March 31, 1997 to zero for the six months ended March 31, 1998 because
the Company repaid all of its long-term debt in May 1997 with a portion of the
proceeds from the sale of its Texas oil and gas properties and pipeline to
UPRC.

TAX PROVISION

         The tax provision for each of the six month periods ended March 31,
1997 and 1998 essentially represents the amortization of the Company's
deferred tax assets at an effective rate of 36% of pre-tax book income. The
Company expects to record a similar tax provision for future earnings to the
extent of the deferred tax asset of $883 (March 31, 1998). If future events
change the Company's estimate concerning the probability of utilizing its tax
assets, appropriate adjustments will be made when such a conclusion is
reached.

         Earnings Per Share

         Since November 1996, the Company has reacquired 3,254,617 shares of
its common stock representing approximately 47.8% of shares then outstanding.
As a result of these share acquisitions, earnings per share have increased
significantly. If no shares had been acquired, earnings per share, assuming no
income from the cash used for share acquisitions, would have been as follows:


                                              Six Months Ended March 31,
                                           ------------------------------
                                             1998                   1997
                                             ----                   ----

Basic..........................              $.80                   $.77
Diluted........................              $.80                   $.76


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

                                     -15-
                                                         
<PAGE>



this report, including without limitation in conjunction with the expected cash
receipts and expected cash obligations included below. All forward-looking
statements in this report are expressly qualified in their entirety by the
cautionary statements in this paragraph.

         During the six months ended March 31, 1998, the Company generated
$22,110 from operating activities. Of this amount, $8,700 represented the
collection of a portion of the MG Note. During the same period the Company
invested $1,000 in a note from Penn Octane, $1,209 in oil and gas drilling
activities and $17,755 to reacquire shares of its common stock. In addition,
it paid $1,414 in stockholder dividends. At March 31, 1998, the Company had
$37,090 of unrestricted cash, $38,917 of working capital and no long-term
debt.

         At the present time the probable future cash expenditures of the
Company consist of the following:

         a. Investments in Oil and Gas Properties and Energy Sector - the
            Company has already entered into a joint venture to drill up to
            100 wells in Appalachia over the next three to four years and has
            undertaken a 10-13 well drilling program on its undrilled Alabama
            acreage. Ten Appalachian wells have been drilled by the joint
            venture. In addition, the Company has drilled six new coalbed
            methane wells in Alabama. At least eleven new Appalachian wells
            are planned by the joint venture over the next year and the
            Company plans to drill additional coalbed methane wells in
            Alabama. In addition, the Company is also reviewing several
            possible joint ventures, reserve acquisitions and drilling
            ventures, as well as other investments in the energy sector. The
            Company believes that low oil and gas prices will increase the
            probability that the Company can conclude a transaction or several
            transactions on terms favorable to the Company. There can be no
            assurance that oil and gas prices will decrease and remain low or
            that a transaction will be closed even if such prices decrease and
            remain low.

         b. Repurchase of Company Shares - as of April 30, 1998, the Company
            had repurchased 3,254,617 of its shares of common stock at a cost
            of $42,918. The Company's Board of Directors had authorized the
            repurchase of up to 3,750,000 shares to provide an exit vehicle
            for investors who want to liquidate their investment in the
            Company. The decision whether to repurchase additional 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.

         c. Recurring Dividends - the Company's Board of Directors adopted a
            policy of paying a $.60 per share annual dividend ($.15 per share
            quarterly) in June of 1997. The Company expects to continue to pay
            such dividend until the Board of Directors, in its sole
            discretion, changes such policy.

                                     -16-
            
<PAGE>



         An estimate of the Company's expected cash resources and obligations
from April 1, 1998 to September 30, 1999, the fiscal year end during which the
Lone Star Contract expires, is as follows:


Expected Cash Resources:                                      ("000's" Omitted)

   Cash on hand - April 1, 1998..........................          $37,090
   Cash flow - gas marketing and remaining exploration
       and production operations.........................           32,612
   Repayment of Penn Octane Corporation note.............            1,000
   Proceeds from platinum recovery - IRLP................              800
   Proceeds from SWAP litigation - IRLP..................              703
   Proceeds from American Western note...................            2,919
   Interest..............................................            6,345
                                                                   -------
                                                                    81,469
                                                                   -------
Expected Cash Obligations:

   New drilling..........................................            2,791
   Purchase of 5,000 shares of common stock of the Company
       from April 1, 1998 to May 11, 1998................               80
   Quarterly dividends (based on outstanding shares at
       May 11,1998)......................................            3,190
   Assumed IRLP payment of vendors and funding of
       environmental reserves............................            4,422
                                                                   -------
                                                                    10,483
                                                                   -------
Excess of Expected Cash Resources Over Expected Cash
       Obligations.......................................          $70,986
                                                                   =======

         The foregoing estimates assume that the Company's operations and
expected cash flow will not be affected by any of the risk factors listed
below:

         a.   Contingent environmental liabilities
         b.   Vendor liabilities of the Company's inactive refining subsidiaries
         c.   Larry Long Litigation
         d.   Credit risk - Lone Star
         e.   Supply risk - MGNG
         f.   Price risk - gas supply
         g.   Gas contract litigation - Lone Star, MGNG
         h.   Public market for Company's stock
         i.   Future of the Company
         j.   Year 2000 risk - accounting and operations
         k.   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.

         In addition, Lone Star has recently informed the Company that it
intends to limit daily deliveries under the Lone Star Contract to precise
nominated quantities rather than a reasonable allowance in excess of such
nominated quantities. The Company and Lone Star are currently negotiating this
point. If the Company is unsuccessful the Company could incur a loss on the
sale of gas in excess of quantities nominated by Lone Star. Although the
Company does not anticipate a material loss, such may not be the case.

                                     -17-
              
<PAGE>



         UPRC has recently terminated employees responsible for the UPRC
deliveries of the Company's gas to Lone Star. If deliveries to Lone Star are
hindered by related pipeline operations problems, the Company could fail to
deliver amounts of gas nominated by Lone Star and by so doing lose the high
gross margins realized on the sale of such gas.

         Finally, the Company has assumed its note due from Penn Octane
Corporation will be paid on its due date, June 30, 1998. To date, all interest
on the note has been paid. Penn Octane has sought to obtain financing and
agreed to repay the Company's note with the proceeds thereof. So far Penn
Octane has not been successful in obtaining financing and therefore there can
be no assurance that the Company's note will be repaid at June 30, 1998 or
thereafter.

         Readers should refer to the Management's 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, 1997 for a detailed description
of the aforementioned risk factors.

         If any or several of these risks materialize, the Company's estimated
cash flow and results of operations will probably be adversely impacted and
the impact may be material. The estimated cash flow above assumes none of
these risks materializes. 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 occur.

                                     -18-
              
<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, 1997. Also see Note 4 to the March 31, 1998 financial statements included
in Part I.

Item 6.  Exhibits and Reports on Form 8-K

         (A) Exhibits:
             Exhibit 10-124 - Asset Purchase Agreement, dated February 27, 1998
                              by and between Castle Energy Corporation and
                              Alexander Allen, Inc.
             Exhibit 11.1 - Statement re: Computation of Earnings Per Share
             Exhibit 27 - Financial Data Schedule

         (B) Reports on Form 8-K:  None



              
<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 11, 1998                             CASTLE ENERGY CORPORATION



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


                                     -20-