<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 June 30, 2003

                                       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 of Incorporation         (I.R.S. Employer
               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)

         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 by check [X] whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act) Yes [ ] No [X].

         Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date: 6,592,884 shares of
Common Stock, $.50 par value outstanding as of August 8, 2003.

<PAGE>

                            CASTLE ENERGY CORPORATION

                                      INDEX

<TABLE>
<CAPTION>
                                                                                                   PAGE #
                                                                                                   ------
<S>                                                                                                    <C>
Part I.      Financial Information

             Item 1. Financial Statements:

                     Consolidated Balance Sheets - June 30, 2003 (Unaudited) and September

                     30, 2002................................................................           1

                     Consolidated Statements of Operations - Three Months Ended June 30, 2003
                     and 2002 (Unaudited)....................................................           2

                     Consolidated Statements of Operations - Nine Months Ended June 30, 2003
                     and 2002 (Unaudited)....................................................           3

                     Condensed Consolidated Statements of Cash Flows - Nine Months Ended
                     June 30, 2003 and 2002 (Unaudited)......................................           4

                     Consolidated Statements of Stockholders' Equity and Other Comprehensive
                     Income - Year Ended September 30, 2002 and Nine Months Ended June 30,
                     2003 (Unaudited)........................................................           5

                     Notes to the Consolidated Financial Statements (Unaudited)                         6

             Item 2. Management's Discussion and Analysis of Financial Condition and
                     Results of Operations...................................................          17

             Item 3. Qualitative and Quantitative Disclosures About Market Risk..............          22

             Item 4. Controls and Procedures.................................................          22

Part II.     Other Information

             Item 1. Legal Proceedings.......................................................          23

             Item 6. Exhibits and Reports on Form 8-K........................................          23

Signature    ................................................................................          24
</TABLE>

<PAGE>

PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

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

<TABLE>
<CAPTION>
                                                                                      JUNE 30,        SEPTEMBER 30,
                                                                                        2003              2002
                                                                                   --------------    --------------
                                                                                     Unaudited
<S>                                                                                <C>               <C>
                                      ASSETS

Current assets:
    Cash and cash equivalents ..................................................   $       11,998    $       15,539
    Restricted cash ............................................................            4,273             4,230
    Accounts receivable ........................................................               62               108
    Marketable securities ......................................................            4,364             3,046
    Prepaid expenses and other current assets ..................................               79               197
    Deferred income taxes ......................................................              748               429
    Note receivable - Networked Energy LLC, net of allowance for doubtful
      account of $126
                                                                                   --------------    --------------
      Total current assets .....................................................           21,524            23,549
Estimated realizable value of discontinued net refining assets .................                                612
Property, plant and equipment, net:
    Furniture, fixtures and equipment ..........................................               78               153
Investment in Networked Energy LLC, net of impairment reserve of $355 at
    June 30, 2003 ..............................................................                                375
Investment in Delta Petroleum Corporation ......................................           27,070            26,886
Deferred income taxes ..........................................................              366               366
                                                                                   --------------    --------------
      Total assets .............................................................   $       49,038    $       51,941
                                                                                   ==============    ==============

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
    Dividend payable ...........................................................   $          330    $          330
    Accounts payable ...........................................................              227               413
    Accrued expenses ...........................................................              296               821
    Accrued taxes on appreciation of marketable securities .....................              748               274
    Fair value of options granted to Delta Petroleum Corporation ...............                                432
    Net refining liabilities retained ..........................................            2,404
                                                                                   --------------    --------------
      Total current liabilities ................................................            4,005             2,270
Net refining liabilities retained ..............................................                              3,016
Long-term liabilities ..........................................................                                 11
                                                                                   --------------    --------------
      Total liabilities ........................................................            4,005             5,297
                                                                                   --------------    --------------
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 June 30, 2003 and September 30, 2002 .........            5,752             5,752
    Additional paid-in capital .................................................           67,365            67,365
    Accumulated other comprehensive income, net of taxes .......................            1,004               487
    Retained earnings ..........................................................           37,579            39,707
                                                                                   --------------    --------------
                                                                                          111,700           113,311
    Treasury stock at cost - 4,911,020 shares at June 30, 2003 and September
      30, 2002 .................................................................          (66,667)          (66,667)
                                                                                   --------------    --------------
      Total stockholders' equity ...............................................           45,033            46,644
                                                                                   --------------    --------------
      Total liabilities and stockholders' equity ...............................   $       49,038    $       51,941
                                                                                   ==============    ==============
</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 JUNE 30,
                                                                                    --------------------------
                                                                                       2003           2002
                                                                                    -----------    -----------
<S>                                                                                 <C>            <C>
Revenues:
    Oil and gas sales ...........................................................                  $     2,525
                                                                                                   -----------

Expenses:
    Oil and gas production ......................................................                          654
    General and administrative ..................................................   $       748          2,183
    Depreciation, depletion and amortization ....................................            14            737
                                                                                    -----------    -----------
                                                                                            762          3,574
                                                                                    -----------    -----------
Operating income (loss) .........................................................          (762)        (1,049)
                                                                                    -----------    -----------

Other income (expense):
    Gain on sale of domestic oil and gas properties .............................                        1,403
    Interest income .............................................................            43              1
    Other income (expense) ......................................................                           19
    Impairment provision - marketable securities ................................                         (184)
    Decrease in fair value of option granted to Delta Petroleum
      Corporation ...............................................................            17            638
    Equity in loss of Networked Energy LLC ......................................                          (51)
    Equity in income (loss) of Delta Petroleum Corporation ......................          (238)          (159)
                                                                                    -----------    -----------
                                                                                           (178)         1,667
                                                                                    -----------    -----------
Income (loss) before provision for (benefit of) income taxes ....................          (940)           618
                                                                                    -----------    -----------

Provision for (benefit of) income taxes:

    State .......................................................................            (5)             1
    Federal .....................................................................          (207)           (15)
                                                                                    -----------    -----------
                                                                                           (212)           (14)
                                                                                    -----------    -----------
Net income (loss) ...............................................................   $      (728)   $       632
                                                                                    ===========    ===========

Net income (loss) per share:

        Basic ...................................................................   $      (.11)   $       .10
                                                                                    ===========    ===========
        Diluted .................................................................   $      (.11)   $       .09
                                                                                    ===========    ===========

    Weighted average number of common and potential dilutive common shares
        outstanding:

       Basic ....................................................................     6,592,884      6,632,884
                                                                                    ===========    ===========
       Diluted ..................................................................     6,616,896      6,782,857
                                                                                    ===========    ===========
</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>
                                                                                       Nine Months Ended June 30,

                                                                                            2003          2002
                                                                                       -----------    -----------
<S>                                                                                    <C>            <C>
Revenues:
    Oil and gas sales ..............................................................                  $     9,224
                                                                                                      -----------

Expenses:
    Oil and gas production .........................................................                        3,267
    General and administrative .....................................................   $     2,055          4,781
    Depreciation, depletion and amortization .......................................            43          3,151
                                                                                       -----------    -----------
                                                                                             2,098         11,199
                                                                                       -----------    -----------
Operating income (loss) ............................................................        (2,098)        (1,975)
                                                                                       -----------    -----------

Other income (expense):
        Gain on sale of domestic oil and gas properties ............................                        1,403
        Interest income ............................................................           194             44
        Other income expense .......................................................             2             20
        Impairment provision - marketable securities ...............................                         (388)
        Decrease in fair value of option granted to Delta Petroleum Corporation ....           432            638
        Equity in loss of Networked Energy LLC .....................................           (20)          (133)
        Equity in income (loss) of Delta Petroleum Corporation .....................           512           (268)
        Impairment provision - investment in Networked Energy LLC ..................          (480)
                                                                                       -----------    -----------
                                                                                               640          1,316
                                                                                       -----------    -----------

Income (loss) before provision for (benefit of) income taxes .......................        (1,458)          (659)
                                                                                       -----------    -----------

Provision for (benefit of) income taxes:

       State .......................................................................            (8)           (11)
       Federal .....................................................................          (311)          (424)
                                                                                       -----------    -----------
                                                                                              (319)          (435)
                                                                                       -----------    -----------
Net income (loss) ..................................................................   $    (1,139)   $      (224)
                                                                                       ===========    ===========

Net income (loss) per share:

        Basic ......................................................................   $      (.17)   $      (.03)
                                                                                       ===========    ===========
        Diluted ....................................................................   $      (.17)   $      (.03)
                                                                                       ===========    ===========

    Weighted average number of common and potential dilutive common shares
        outstanding:

       Basic .......................................................................     6,592,884      6,632,884
                                                                                       ===========    ===========
       Diluted .....................................................................     6,601,764      6,765,208
                                                                                       ===========    ===========
</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)
                                  (Unaudited)

<TABLE>
<CAPTION>
                                                                                  NINE MONTHS ENDED JUNE 30,
                                                                                  -------------------------
                                                                                     2003          2002
                                                                                  ----------    ----------
<S>                                                                               <C>           <C>
Net cash flow provided by (used in) operating activities ......................   $   (2,427)   $   (2,041)
                                                                                  ----------    ----------

Net cash flows from investing activities:
       Investment in furniture, fixtures and equipment ........................                        (10)
       Investment in Networked Energy LLC .....................................         (125)         (150)
       Investment in oil and gas properties ...................................                       (838)
       Proceeds from sale of oil and gas properties ...........................                     15,672
                                                                                  ----------    ----------
                                                                                        (125)       14,674
                                                                                  ----------    ----------

Net cash flows from financing activities:
         Dividends paid to stockholders .......................................         (989)       (1,006)
                                                                                  ----------    ----------
                                                                                        (989)       (1,006)
                                                                                  ----------    ----------
Net increase (decrease) in cash and cash equivalents ..........................       (3,541)       11,627
Cash and cash equivalents - beginning of period ...............................       15,539         5,844
                                                                                  ----------    ----------
Cash and cash equivalents - end of period .....................................   $   11,998    $   17,471
                                                                                  ==========    ==========

Supplemental schedule of non-cash investing and financing activities:

       Exchange of oil and gas properties for Delta Petroleum Corporation
         common stock ..........................................................                $   26,952
                                                                                                ==========
       Estimated value of Delta option to repurchase 3,188,667 Delta shares....                 $    2,681
                                                                                                ==========
</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, 2002 AND NINE MONTHS ENDED JUNE 30, 2003 (Unaudited)
                                                    ----------------------------------------------------------------------------
                                                                COMMON STOCK         ADDITIONAL
                                                       --------------------------      PAID-IN     COMPREHENSIVE
                                                         SHARES         AMOUNT         CAPITAL        INCOME
                                                       -----------    -----------    -----------   -------------
<S>                                                     <C>           <C>            <C>            <C>
Balance - October 1, 2001 ..........................    11,503,904    $     5,752    $    67,365
Stock acquired .....................................
Dividends declared ($.15 per share)
Comprehensive income (loss): .......................
  Net income (loss) ................................                                                $    (2,102)
  Other comprehensive loss: ........................
     Unrealized loss on  marketable securities, net
      of tax .......................................                                                     (1,113)
                                                                                                    -----------
                                                                                                    $    (3,215)
                                                       -----------    -----------    -----------    ===========
Balance - September 30, 2002 .......................    11,503,904          5,752         67,365

Dividends declared ($.15 per share) ................
Comprehensive income (loss): .......................
  Net income (loss) ................................                                                $    (1,139)
  Other comprehensive income: ......................
     Unrealized gain on  marketable securities, net
      of tax .......................................                                                        843
  Equity in other comprehensive loss of Delta
     Petroleum Corporation .........................                                                       (326)
                                                                                                    -----------
                                                                                                    $      (622)
                                                       -----------    -----------    -----------    ===========
Balance - June 30, 2003 ............................    11,503,904    $     5,752    $    67,365
                                                       ===========    ===========    ==========

<CAPTION>
                                                    YEAR ENDED SEPTEMBER 30, 2002 AND NINE MONTHS ENDED JUNE 30, 2003 (UNAUDITED
                                                    ----------------------------------------------------------------------------
                                                      ACCUMULATED
                                                         OTHER          RETAINED           TREASURY STOCK
                                                      COMPREHENSIVE     EARNINGS     --------------------------
                                                         INCOME         (DEFICIT)      SHARES         AMOUNT          TOTAL
                                                      -------------   -----------    -----------    -----------    -----------
<S>                                                    <C>            <C>              <C>          <C>            <C>
Balance - October 1, 2001 ..........................   $     1,600    $    42,816      4,871,020    $   (66,506)   $    51,027
Stock acquired .....................................                                      40,000           (161)          (161)
Dividends declared ($.15 per share) ................                       (1,007)                                      (1,007)
Comprehensive income (loss): .......................
  Net income (loss) ................................                       (2,102)                                      (2,102)
  Other comprehensive loss: ........................
     Unrealized loss on  marketable securities, net
      of tax .......................................        (1,113)                                                     (1,113)

                                                       -----------    -----------    -----------    -----------    -----------
Balance - September 30, 2002 .......................           487         39,707      4,911,020        (66,667)        46,644

Dividends declared ($.15 per share) ................                         (989)                                        (989)
Comprehensive income (loss): .......................
  Net income (loss) ................................                       (1,139)                                      (1,139)
  Other comprehensive income: ......................
     Unrealized gain on  marketable securities, net
      of tax .......................................           843                                                         843
  Equity in other comprehensive loss of Delta
     Petroleum Corporation .........................          (326)                                                       (326)
                                                       -----------    -----------    -----------    -----------    -----------
Balance - June 30, 2003 ............................   $     1,004    $    37,579      4,911,020    $   (66,667)   $    45,033
                                                       ===========    ===========    ===========    ===========    ===========
</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 ("SEC"). 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 nine-month period ended June 30, 2003 are not necessarily indicative of
the results that may be expected for the fiscal year ending September 30, 2003
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, 2002.

         In the opinion of the Company, the unaudited consolidated financial
statements contain all adjustments necessary for a fair statement of the results
of operations for the three-month and nine-month periods ended June 30, 2003 and
2002 and for a fair statement of financial position at June 30, 2003.

Note 2 - September 30, 2002 Balance Sheet

         The amounts presented in the balance sheet as of September 30, 2002
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, 2002.

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 seven years and are in the process of
liquidation. As a result, the Company has accounted for its refining operations
as discontinued operations. Such discontinued refining operations have not
impacted the Company's operations since September 30, 1995, although they may
impact the Company's future operations.

Note 4 - Environmental Liabilities/Litigation

         ChevronTexaco Litigation

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

                                       -6-
<PAGE>

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

         History

         In December 1995, Indian Refining Limited Partnership, an inactive
subsidiary of the Company, ("IRLP") sold its refinery, the Indian Refinery, to
American Western Refining Limited Partnership ("American Western"), an
unaffiliated party. As part of the related purchase and sale agreement, American
Western assumed all environmental liabilities and indemnified IRLP with respect
thereto. Subsequently, American Western filed for bankruptcy and sold large
portions of the Indian Refinery to an outside party pursuant to a bankruptcy
proceeding. The outside party has substantially dismantled the Indian Refinery.
American Western filed a Liquidation Plan in 2001. American Western anticipated
that the Liquidation Plan would be confirmed in January 2002 but confirmation
was delayed primarily because of legal challenges by Texaco, and subsequently
ChevronTexaco. American Western's Liquidation Plan was confirmed in April 2003.
Pursuant to that plan, IRLP received $600 which it is currently distributing pro
rata to its creditors.

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

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

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

         Claims by Texaco

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

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

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

                                       -7-
<PAGE>

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

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

         Litigation

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

         On October 25, 2002, the Company filed motions to dismiss as a matter
of law the contractual claims in Texaco's complaint, as well as the OPA and RCRA
claims. At the same time, the Company filed its answer to ChevronTexaco's
lawsuit on the remaining CERCLA claim. A pre-trial scheduling conference was
held May 5, 2003 and on May 8, 2003, two unrelated defendants were dismissed
from the case with prejudice under a stipulation with ChevronTexaco on
undisclosed terms. On June 2, 2003, the Federal District Court denied the
Company's motions to dismiss, following which on July 9, 2003, the Company filed
answers to the contractual, OPA and RCRA claims. The parties are currently
conducting discovery and depositions. The Federal District Court has set a
presumptive trial date for this matter for December 13, 2004, but the actual
trial date could be later due to a crowded docket in the district. The Company
does intend to pursue all available opportunities for early dismissal of this
matter, including requests for summary judgement prior to trial.

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

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

                                       -8-
<PAGE>

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

         The Company and its special counsel, Reed Smith LLP, believe that
ChevronTexaco's previous and current claims, including ChevronTexaco's newly
expressed legal theories, are without merit and the Company intends to
vigorously defend itself against all of ChevronTexaco's claims in the litigation
and any lawsuits that may follow. In addition to the numerous defenses that the
Company has against ChevronTexaco's contractual claim for indemnity, the Company
and its special counsel believe that by the express language of the agreement
which ChevronTexaco construes to create an indemnity, ChevronTexaco has
irrevocably elected to forego all rights of contractual indemnification it might
otherwise have had against any person, including the Company.

         Contingent Environmental Liabilities

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

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

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

         Powerine

         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 of Powerine. In August 1998, EMC sold
the Powerine Refinery, which it had subsequently acquired from Kenyen, to a
third party.

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

         Other Litigation

         Long Trusts Lawsuit

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

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

                                       -9-
<PAGE>

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

         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 judgment
on some of the Long Trusts' claims against the Company and its subsidiaries, as
well as CTPLP's counterclaims against the Long Trusts. The District Court issued
an amended judgment on September 5, 2001 which became final December 19, 2001.
The net amount awarded to the plaintiffs was approximately $2,700.

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

         To pursue the appeal, the Company and its subsidiaries were required to
post a bond to cover the gross amount of damages awarded to the Long Trusts,
including interest and attorney's fees, and to maintain that bond until the
resolution of the appeal. Originally, the Company and its subsidiaries
anticipated posting a bond of approximately $3,000 based upon the net amount of
damages but the Company and its subsidiaries later decided to post a bond of
$3,886 based upon the gross damages in order to avoid on-going legal expenses
and to expeditiously move the case to the Tyler Court of Appeals. The
certificate of deposit, including accumulated interest, supporting the bond was
$4,063 as of June 30, 2003. The letter of credit supporting this bond was
provided by the Company's lender pursuant to the Company's line of credit with
that lender, and such letter of credit was supported by a certificate of deposit
of the Company. The certificate of deposit will remain restricted until the
appeals have been completed. Having sold all of its domestic oil and gas
properties, the Company no longer directly owns any oil and gas assets with
which to collateralize the bond.

         The Long Trusts may file a motion for rehearing with the Twelfth Court
of Appeals as well as a petition for review with the Supreme Court of Texas. The
Company may also file a motion for rehearing and a petition for review in order
to request that the breach of contract claims be reversed and rendered against
the Long Trusts rather than remanded for new trial. The Texas Supreme Court
grants only a small percentage of petitions for review that are filed. Should
the breach of contract claims be retried, the Company will vigorously defend
against them. Based on the evidence presented at the initial trial, the Company
believes such claims, even if decided adversely to the Company, will not result
in a material loss to the Company. Assuming that the Long Trusts file a petition
for review with the Supreme Court of Texas, the Company will be required to
maintain its appeal bond until 30 days following a decision by the Supreme
Court, which could be in spring 2004 if the petition is denied or several years
if the petition is granted. When all appeals are completed and if there are no
further changes to the decision by the Twelfth Court of Appeals, CTPLP will be
permitted to enforce its judgment against the Long Trusts.

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

         Pilgreen Litigation

         As part of the oil and gas properties acquired from AmBrit in June
1999, Castle Exploration Company, Inc., a wholly-owned subsidiary of the Company
("CECI") acquired a 10.65% overriding royalty interest ("ORRI") in the Simpson
lease in south Texas, including the Pilgreen #2ST gas well. CECI subsequently
transferred that interest to Castle Texas Oil and Gas Limited Partnership
("CTOGLP"), an indirect wholly-owned subsidiary. Because the operator suspended
revenue attributable to the ORRI from first production due to title disputes,
AmBrit, the previous owner, filed claims against the operator of the Pilgreen
well, and CTOGLP acquired rights in that litigation with respect to the period
after January 1, 1999. The Company and the operator signed an agreement to
release $282 of the suspended revenue attributable to CTOGLP's ORRI in the
Pilgreen well to CTOGLP subject to judicial approval. Because of a claim by
Dominion Oklahoma Texas Exploration and Production, Inc. ("Dominion") (see
below), a working interest owner in the same well, that CTOGLP's ORRI in the
Simpson lease should be deemed burdened by 3.55% overriding royalty interest,
there is still a title dispute as to approximately $120 of suspended CTOGLP
Pilgreen #2ST production proceeds for the Company's account. (The Company sold
all of its oil and gas assets, including the Pilgreen #2ST well, to Delta on May
31, 2002.) The Company has named Dominion as a defendant in a legal action
seeking a declaratory judgment that the Company is entitled to its full 10.65%
overriding royalty interest in the Pilgreen well. The Company believes that
Dominion's title exception to CTOGLP's overriding royalty interest is erroneous
and notes that several previous title opinions have confirmed the validity of
CTOGLP's interest.

                                      -10-
<PAGE>

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

         CTOGLP has also been informed that production proceeds from an
additional well on the Simpson lease in which CTOGLP has a 5.325% overriding
royalty interest have been suspended by the court because of title disputes. The
Company intends to contest this matter vigorously. At the present time, the
amount held in escrow applicable to the additional well accruing to the
Company's interest is $66.

         In August 2002, $282 was released to the Company of which $249 was
recorded as income by the Company and the remaining $33 paid to Delta.

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

         Dominion Litigation

         On March 18, 2002, Dominion, operator of the Mitchell and Migl-Mitchell
wells in the Southwest Speaks field in south Texas and a working interest owner
in the Pilgreen #2ST well, filed suit in Texas against CTOGLP seeking
declaratory judgment in a title action that the overriding royalty interest held
by CTOGLP in these wells should be deemed to be burdened by certain other
overriding royalty interests aggregating 3.55% and should therefore be reduced
from 10.65% to 7.10%. Dominion is also seeking an accounting and refund of
payments for overriding royalty to CTOGLP in excess of the 7.10% since April
2000. The Company preliminarily estimates the amount in controversy to be
approximately $1,180. Dominion threatened to suspend all revenue payable to the
Company from the Mitchell and Migl-Mitchell to offset its claim. The Company and
Dominion are currently examining land and lease documents concerning the
overriding royalty interests. The Company believes that Dominion's title
exception to CTOGLP's overriding royalty interest is erroneous and notes that
several previous title opinions have confirmed the validity of CTOGLP's
interest.

         On or about July 19, 2003, Dominion filed a motion for partial summary
judgement concerning the Company's claim that it had assumed the liabilities of
its predecessor in interest. On July 28, 2003, CTOGLP filed its response to
Dominion's motion as well as its own cross motion for pretrial summary
judgement. The hearing on both motions is set before the District Court of
Lavaca County, Texas on August 19, 2003.

         The Company is contesting this matter vigorously and has accordingly
made no provision for Dominion's claim in its June 30, 2003 financial
statements.

         GAMXX

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

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

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

                                      -11-
<PAGE>

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

Note 5 - New Accounting Pronouncements

         Statement of Financial Accounting Standards No. 141, "Business
Combinations" ("SFAS No. 141") and Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142") were issued in
July 2001. SFAS No. 141 requires that all business combinations entered into
subsequent to June 30, 2001 be accounted for under the purchase method of
accounting and that certain acquired intangible assets in a business combination
be recognized and reported as assets apart from goodwill. SFAS No. 142 requires
that amortization of goodwill be replaced with periodic tests of the goodwill's
impairment at least annually in accordance with the provisions of SFAS No. 142
and that intangible assets other than goodwill be amortized over their useful
lives. The Company adopted SFAS No. 141 in July 2001 and adopted SFAS No. 142 on
October 1, 2002. Amortization of goodwill for the three and nine month periods
ended June 30, 2002 was $2 and $6, respectively.

         In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement No. 143, "Accounting for Asset Retirement Obligations" ("SFAS No.
143"), which provides accounting requirements for retirement obligations
associated with tangible long-lived assets, including: 1) the timing of
liability recognition; 2) initial measurement of the liability; 3) allocation of
asset retirement cost to expense; 4) subsequent measurement of the liability;
and 5) financial statement disclosures. SFAS No. 143 requires that asset
retirement cost be capitalized as part of the cost of the related long-lived
asset and subsequently allocated to expense using a systematic and rational
method. Any transition adjustment resulting from the adoption of SFAS No. 143
would be reported as a cumulative effect of a change in accounting principle.
The Company adopted this statement effective October 1, 2002. The adoption of
this statement did not have any material effect on the Company's financial
position or results of operations since the Company disposed of its long-lived
assets, its oil and gas properties, to which SFAS No. 143 would have applied, in
May 2002.

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

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

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

                                      -12-
<PAGE>

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

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

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

         In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interests Entities, an Interpretation of ARB No. 51"
("Interpretation No. 46"). This Interpretation addresses the consolidation by
business enterprises of variable interest entities as defined in the
Interpretation. Interpretation No. 46 applies immediately to variable interests
in variable interest entities created after January 31, 2003, and to variable
interests in variable interest entities obtained after January 31, 2003. For
public enterprises with a variable interest in a variable interest entity
created before February 1, 2003, the Interpretation applies to that enterprise
no later than the beginning of the first interim or annual reporting period
beginning after June 15, 2003. The Interpretation requires certain disclosures
in financial statements issued after January 31, 2003 if it is reasonably
possible that the Company will consolidate or disclose information about
variable interest entities when the Interpretation becomes effective. The
Company does not expect Interpretation No. 46 to have any effect on the
Company's future financial position or results of operations.

Note 6 - Sale of Domestic Oil and Gas Properties to Delta

         On May 31, 2002, the Company consummated the sale of all of its
domestic oil and gas properties to Delta Petroleum Corporation, a public
exploration and production company ("Delta"). The sale was pursuant to a
definitive purchase and sale agreement dated January 15, 2002. Pursuant to the
governing purchase and sale agreement, the Company granted Delta an option to
repurchase up to 3,188,667 of Delta's shares at $4.50/share for a period of one
year after closing. That option was valued at $2,682 at May 31, 2002 using the
Black Scholes method and recorded as a liability. On May 31, 2003, the option
expired unexercised. After the sale, the Company owned approximately 44% of
Delta. As a result of subsequent capital transactions (primarily the exercise of
stock options) at Delta, the Company's ownership of Delta decreased to 43%
(9,948,289 shares) by March 31, 2003 and thereafter.

                                      -13-
<PAGE>

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

Note 7 - Income Taxes

         The Company's deferred taxes are comprised of the following:

<TABLE>
<CAPTION>
                                                                       JUNE 30, 2003      SEPTEMBER 30, 2002
                                                                    ------------------    ------------------
                                                                       (Unaudited)
<S>                                                                 <C>                   <C>
Deferred tax assets - gross .....................................   $            6,434    $            5,792
Valuation allowance .............................................               (5,320)               (4,997)
                                                                    ------------------    ------------------
Deferred tax assets - net .......................................   $            1,114    $              795
                                                                    ==================    ==================
</TABLE>

         At June 30, 2003, the Company determined that $5,320 of its gross
deferred tax asset more likely than not would not be realized and thus increased
its valuation allowance from $4,997 at September 30, 2002 to $5,320 at June 30,
2003. If future taxable income (loss) estimates change, the Company will change
its valuation allowance. The net deferred tax asset relates to income that has
been recognized for tax purposes but has not been recognized for financial
reporting purposes.

Note 8 - Restricted Cash

         Restricted cash consists of the following:

<TABLE>
<CAPTION>
                                                                      JUNE 30, 2003      SEPTEMBER 30, 2002
                                                                    ------------------   ------------------
                                                                     (Unaudited)
<S>                                                                 <C>                  <C>
Funds supporting bond for Long Trusts Lawsuit ...................   $            4,063   $            4,020
Funds supporting letters of credit for operating bonds ..........                  210                  210
                                                                    ------------------   ------------------
                                                                    $            4,273   $            4,230
                                                                    ==================   ==================
</TABLE>

         The Company anticipates that the funds supporting letters of credit for
operating bonds will be replaced by Delta before September 30, 2003.

                                      -14-
<PAGE>

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

Note 9 - Investment in Delta Petroleum Corporation

         Condensed financial information concerning Delta is as follows:

                     Condensed Balance Sheet

<TABLE>
<CAPTION>
                                                                      MARCH 31, 2003     SEPTEMBER 30, 2002
                                                                    ------------------   ------------------
                                                                        (Unaudited)          (Unaudited)
<S>                                                                 <C>                  <C>
                          Assets

Current assets ..................................................   $            8,488   $            8,392
Oil and gas properties, net .....................................               67,378               66,147
Other assets ....................................................                  383                  432
                                                                    ------------------   ------------------
                                                                    $           76,249   $           74,971
                                                                    ==================   ==================

           Liabilities and Stockholders' Equity

   Current liabilities, including current portion of long-term
    debt ........................................................   $            7,325   $            7,085
   Long-term liabilities ........................................               22,036               23,584
   Stockholders' equity .........................................               46,888               44,302
                                                                    ------------------   ------------------
                                                                    $           76,249   $           74,971
                                                                    ==================   ==================
</TABLE>

<TABLE>
<CAPTION>
                                                                          SIX MONTHS         THREE MONTHS        NINE MONTHS
                                                                             ENDED               ENDED              ENDED
                                                                        MARCH 31, 2003       JUNE 30, 2002       JUNE 30, 2002
                                                                       ----------------    ----------------    ----------------
                                                                          (Unaudited)         (Unaudited)         (Unaudited)
<S>                                                                    <C>                 <C>                 <C>
           Condensed Statement of Operations

Revenue:
  Oil and gas sales ................................................   $         13,808    $          2,804    $          5,705
  Other ............................................................             (1,129)                116                  62
                                                                       ----------------    ----------------    ----------------
                                                                                 12,679               2,920               5,767
                                                                       ----------------    ----------------    ----------------
Expense:
  Lease operating expenses .........................................              5,123    $          1,693    $          3,651
  General and administrative .......................................              2,045               1,173               2,748
  Depreciation, depletion and amortization .........................              2,620               1,098               2,554
  Other ............................................................                326               1,438               1,960
                                                                       ----------------    ----------------    ----------------
                                                                                 10,114               5,402              10,913
                                                                       ----------------    ----------------    ----------------
Other income (expense) .............................................               (830)               (278)               (863)
                                                                       ----------------    ----------------    ----------------
Income (loss) before taxes .........................................              1,735              (2,760)             (6,009)
Income taxes .......................................................
                                                                       ----------------    ----------------    ----------------
Net income (loss) ..................................................   $          1,735    $         (2,760)   $         (6,009)
                                                                       ================    ================    ================
</TABLE>

         The above condensed financial information has been compiled using
Delta's unaudited quarterly financial statements for the periods presented.

         Delta' stock is traded on the Nasdaq stock market under the symbol
"DPTR." At June 30, 2003, the closing price of Delta's common stock was $4.58
per share.

                                      -15-
<PAGE>

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

         Since Delta's fiscal year ends June 30th, Delta has not yet closed its
books for the quarter or year ended June 30, 2003. As a result, the Company's
share of Delta's results of operations for the quarter ended June 30, 2003 is
based upon estimates provided by Delta's management. Actual results may vary
significantly from these estimates. Any variances from these estimates will be
recorded in the company's fourth fiscal quarter. In addition, condensed balance
sheet and condensed statement of operations data concerning Delta have been
present as of and through March 31, 2003, the latest period for which such
information is available, rather than as of and through June 30, 2003. Reference
should be made to Delta's public filings for current information concerning
Delta and its financial position and results of operations.

         At June 30, 2003, there were approximately 5,400,000 options and
warrants to acquire Delta's stock outstanding, including options and warrants
that were out of the money. The Company holds none of these options and
warrants. If all such options and warrants had been exercised at June 30, 2003,
the Company's percentage ownership of Delta would have decreased to
approximately 35%.

Note 10 - Investment in Networked Energy LLC

         Networked Energy LLC ("Networked") is a private company engaged in the
planning, installation and operation of natural gas fueled energy generating
facilities that supply power, heating and cooling services directly to retail
customers with significant energy consumption to reduce their energy costs -
especially during peak usage periods. The Company's investment in Networked
consists of the following:

<TABLE>
<CAPTION>
                                                      JUNE 30, 2003       SEPTEMBER 30, 2002
                                                 ---------------------    ------------------
                                                        UNAUDITED
         <S>                                      <C>         <C>         <C>
         Investment in Networked ................             $    354    $              375
         Note receivable - Networked ............ $    126
         Impairment provision ...................                 (354)
         Allowance for doubtful account .........     (126)
                                                   -------    --------    ------------------
                                                                          $              375
                                                   =======    ========    ==================
</TABLE>

         The Company recorded the impairment provision and the allowance for
doubtful accounts at March 31, 2003 because Networked had not yet obtained
contracts for the services it offers.

Note 11 - Amendment of Stockholder Rights Plan

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

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

                                      -16-
<PAGE>

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

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

RESULTS OF OPERATIONS

         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 are discussed below. All forward-looking statements in this Form 10-Q are
expressly qualified in their entirety by the cautionary statements in this
paragraph.

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

         As noted above, the Company sold all of its domestic oil and gas
properties to Delta on May 31, 2002. In addition, on September 6, 2002, the
Company sold all of its oil and gas interests in Romania to the operator of the
Romanian concessions. As a result of these sales the Company does not directly
own any operating assets. Furthermore, after May 31, 2002, the Company reduced
the number of its employees from 27 full-time employees to 2 full-time employees
and 4 part-time employees. As a result of these asset sales and the reduction in
the Company's employees, comparison of fiscal 2003 and fiscal 2002 operations by
revenue and expense category is not meaningful. Discussion will, therefore, be
limited to analysis of operations for the nine months ended June 30, 2003 with
comparisons to prior year's operations only where warranted.

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

         General and administrative expenses decreased $2,726 or 57% from the
nine months ended June 30, 2002 to the nine-months ended June 30, 2003 primarily
because of the reduction of full-time employees from twenty-seven to two. The
decrease was, however, partially offset by increased legal expenses related to
the ChevronTexaco litigation (see Note 4 to the financial statements). Although
the Company has significantly reduced its personnel costs, its continuing public
company costs (audit, printing, legal compliance, stock transfer fees, stock
exchange costs, etc.) continue and significant legal costs related to the
ChevronTexaco litigation are expected in the future. If the Company is able to
terminate this litigation, it anticipates that it would liquidate and both
public company and legal costs would then decrease significantly or disappear
altogether.

         Depreciation, depletion and amortization decreased $3,108 from the
first nine months of fiscal 2002 to the first nine months of fiscal 2003 because
the Company sold all of its producing oil and gas properties to Delta in May
2002 and thus incurred no depletion expense during nine months ended June 30,
2003. The $43 of depreciation, depletion and amortization for the nine months
ended June 30, 2003 consists of depreciation of the Company's office equipment
and furniture.

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

         Decrease in fair value of option granted to Delta............    $  432
                                                                          ======
         Equity in income (loss) of Delta.............................    $  512
                                                                          ======

                                      -17-
<PAGE>

         The $432 decrease in the value of the option granted to Delta relates
to a decrease in the fair value of the option that the Company granted to Delta
to acquire 3,188,667 of its shares back from the Company at $4.50 per share
through May 31, 2003. That option expired unexercised on May 31, 2003. The fair
market value of Delta's option decreased primarily because of a decrease in
Delta's share price from May 31, 2002 to March 31, 2003 and the passage of time.
The equity in the income of Delta represents the Company's share of Delta's
estimated net income for the nine-months ended June 30, 2003. The Company
currently owns 43% of Delta. Prior to May 31, 2002 the Company owned only 3.4%
of Delta and accounted for its investment in Delta as available-for-sale
securities. Commencing June 1, 2002, the Company accounted for its investment in
Delta using the equity method. See "Critical Accounting Policies" below.

         The Company's equity in the loss of Networked decreased $113 from $133
for the nine-months ended June 30, 2002 to $20 for the nine months ended June
30, 2003. The decrease results from decreased expenses incurred by Networked and
the fact that the Company provided a 100% impairment provision for its
investment in and loan to Networked at March 31, 2003. As a result of such
provisions, which reduced the book value of the Company's investment in and loan
to Networked to zero, the Company ceased recording any further equity in
Networked's losses subsequent to March 31, 2003. For the quarter ended June 30,
2003, Networked recorded a net loss of $12, no portion of which was recorded by
the Company.

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

         The $319 tax benefit for the nine-months ended June 30, 2003 results
primarily because of changes in the Company's expectations concerning future
taxable income. The Company increased its valuation allowance at September 30,
2002 by $323 at June 30, 2003 resulting in a deferred tax asset, net of $748 of
accrued income taxes on appreciation of marketable securities, of $366. The net
deferred tax asset at June 30, 2003 relates to income that has been recognized
for tax purposes, but has not yet been recognized for financial reporting
purposes.

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

LIQUIDITY AND CAPITAL RESOURCES

         During the nine months ended June 30, 2003, the Company used $2,427 in
operating activities. During the same period the Company invested $125 in
Networked and paid $989 for dividends to stockholders. At June 30, 2003, the
Company had $11,998 of unrestricted cash, $17,519 of working capital, no
long-term debt and no operating assets or operating revenues, having sold all of
its domestic oil and gas properties to Delta on May 31, 2002 and its Romanian
oil and gas concessions to the operator of those concessions in September 2002.

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

                                      -18-
<PAGE>

LIQUIDATION

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

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

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

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

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

                                      -19-
<PAGE>

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

CONTINUING TO OPERATE

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

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

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

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

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

CRITICAL ACCOUNTING POLICIES:

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

Equity Method of Accounting

         The Company currently owns approximately 43% of Delta and accounts for
its investment in Delta using the equity method of accounting. Under this
method, the Company is required to increase its investment in Delta by its share
of Delta's income and decrease such investment by its share of Delta's losses
and any distributions from Delta. If Delta incurs future losses, the Company
would thus include its share of such losses in its consolidated statement of
operations. In addition, the Company estimates that its investment in Delta
exceeded the Company's proportional share of Delta's equity by approximately
$7,000 at June 30, 2003. The Company has allocated such excess to Delta's
ownership interests in offshore California leases and the related potential
recovery from a lawsuit Delta and other owners of offshore California leases
have instituted against the United States for breach of contract. The Company is
required to evaluate the recoverability of the leases periodically and write off
the excess costs or reduce them to the extent they are not deemed recoverable.
In addition, if Delta incurs recurring losses in the future and/or the market
value of its stock declines significantly, the Company's investment in Delta may
be impaired and the Company may then be required to recognize the impairment.

                                      -20-
<PAGE>

Discontinued Refining Operations

         At June 30, 2003, the Company had recorded net refining liabilities
retained of $2,404. As noted in Note 4 to the consolidated financial statements
included in this Form 10-Q. ChevronTexaco has sued the Company for environmental
remediation costs that have been estimated at $80,000-$150,000. In January 2003,
the United States and the State of Illinois filed a motion which estimated the
total costs for just one portion of the Indian Refinery-Texaco-Lawrenceville
Superfund Site to be $109,000 to $205,000. The Company's accounting policy with
respect to contingent environmental liabilities is to record environmental
liabilities when and if environmental assessment and/or remediation costs are
probable and can be reasonably estimated. Although the Company and its special
counsel believe that ChevronTexaco's claims are without merit, the Company would
be required to record additional environmental liabilities if it becomes
probable that the Company will incur liabilities related to ChevronTexaco's
claims and/or other environmental liabilities and such liabilities exceed
$2,404. As noted above, if such liabilities exceed the value of the Company's
assets, the Company would not have the financial capability to pay such
liabilities. The Company has classified the net refining liabilities retained as
current at June 30, 2003 because the matter is in litigation and may be settled
in a year. The amounts and classification of the estimated values of
discontinued net refining assets and net refining liabilities retained could
change significantly in the future as a result of litigation or other factors.

Future Distributions to Stockholders, If Any

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

Valuation Allowance for Deferred Income Tax Asset

         At June 30, 2003, the Company recorded a valuation allowance of $5,320,
substantially offsetting its gross deferred tax asset of $6,434 at that date.
That valuation allowance is based upon the Company's assessment that the Company
will not generate future taxable income to utilize all of its gross deferred tax
assets at June 30, 2003 based primarily on the Company's expectations that it
will incur significant general and administrative expenses liquidating its
assets without earning offsetting revenue. In addition, the Company is a party
to several lawsuits, including a complaint for environmental indemnification,
for which the Company has recorded no liabilities except for $2,404 of net
refining liabilities retained. The net deferred tax asset at June 30, 2003
relates to income that has been recognized for tax purposes but has not yet been
recognized for financial reporting purposes. If circumstances change such that
the Company expects future taxable income, the Company will revise its valuation
allowance, resulting in tax recoveries.

Investment in Networked

         At March 31, 2003, the Company recorded a $480 impairment provision
related to its investment in Networked. This provision consisted of $354
provision related to the Company's 45% equity investment in Networked and a $126
provision related to the Company's $126 note receivable from Networked. The
impairment provisions were recorded because Networked had not entered into any
revenue generating contracts by May 9, 2003. Nevertheless, Networked is still
seeking revenue generating contracts and may be successful in obtaining such
contracts in the future. If Networked succeeds, the Company may record income.

                                      -21-
<PAGE>

Item 3.  QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK

         The Company has sold all of its oil and gas production and currently is
not subject to market risk on the prices received for oil and gas production as
in the past.

Item 4.  CONTROLS AND PROCEDURES

         The conclusions of the Company's Chief Executive Officer and Chief
Financial Officer concerning the effectiveness of the Company's disclosure
controls and procedures and changes in internal controls as of June 30,, 2003
are as follows:

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

         b)       There have not been any significant changes in our internal
                  controls or in other factors that could significantly affect
                  such controls subsequent to June 30, 2003.

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

                                      -22-
<PAGE>

                           PART II. OTHER INFORMATION

Item 1.  Legal Proceedings

         For information regarding lawsuits and legal matters, reference is made
to Item 3 of the Company's Form 10-K (Annual Report) for the fiscal year ended
September 30, 2002. Also see Note 4 to the June 30, 2003 consolidated financial
statements included in Part I.

Item 6.  Exhibits and Reports on Form 8-K

         (A)      Exhibits:
                      Exhibit 11.1      Statement re: Computation of Earnings
                                        Per Share
                      Exhibit 31.1      Certificate of Chief Executive Officer
                                        (Section 302 of Sarbanes Oxley Act)
                      Exhibit 31.2      Certificate of Chief Financial Officer
                                        (Section 302 of Sarbanes Oxley Act)
                      Exhibit 32.1      Certificate of Chief Executive Officer
                                        (Section 906 of Sarbanes Oxley Act)
                      Exhibit 32.2      Certificate of Chief Financial Officer
                                        (Section 906 of Sarbanes Oxley Act)

         (B)      Reports on Form 8-K: None

                                      -23-
<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:    August 13, 2003               CASTLE ENERGY CORPORATION


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

                                      -24-