<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 December 31, 2004

                                       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        (I.R.S. Employer Identification No.)
    Incorporation or Organization)

  357 South Gulph Road, Suite 260, King of Prussia, Pennsylvania        19406
  --------------------------------------------------------------     ----------
            (Address of Principal Executive Offices)                 (Zip Code)

        Registrant's Telephone Number, Including Area Code (610) 992-9900


              ----------------------------------------------------
              (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: 6,990,384 shares of
Common Stock, $.50 par value, outstanding as of February 7, 2005.

<PAGE>

                            CASTLE ENERGY CORPORATION

                                      INDEX

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

         Item 1.    Financial Statements:

                    Consolidated Balance Sheets - December 31, 2004 (Unaudited) and
                    September 30, 2004...............................................................      2

                    Consolidated Statements of Operations - Three Months Ended
                    December 31, 2004 and 2003 (Unaudited)...........................................      3

                    Condensed Consolidated Statements of Cash Flows - Three Months Ended
                    December 31, 2004 and 2003 (Unaudited)...........................................      4

                    Consolidated Statements of Stockholders' Equity and Other Comprehensive
                    Income - Year Ended September 30, 2004 and Three Months Ended
                    December 31, 2004 (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......................      21

           Item 4.  Controls and Procedures.........................................................      21

Part II.   Other Information

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

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

Signature...........................................................................................      23
</TABLE>

                                       -1-
<PAGE>

                          PART I. FINANCIAL INFORMATION

Item 1.  Financial Statements

                            CASTLE ENERGY CORPORATION
                           CONSOLIDATED BALANCE SHEETS
                     ("$000'S" OMITTED EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                                   DECEMBER 31,    SEPTEMBER 30,
                                                                                       2004             2004
                                                                                  -------------    -------------
                                                                                   (UNAUDITED)
<S>                                                                               <C>              <C>
                                     ASSETS
Current assets:
  Cash and cash equivalents ....................................................  $      33,103    $      33,742
  Restricted cash ..............................................................            120              120
  Accounts receivable ..........................................................            727              582
  Account receivable - Delta Petroleum Corporation .............................                             339
  Marketable securities ........................................................             19               19
  Prepaid expenses and other current assets ....................................            142              203
  Note receivable - Networked Energy LLC, net of allowance for
   doubtful account of $126 ....................................................
                                                                                  -------------    -------------
      Total current assets .....................................................         34,111           35,005
Property, plant and equipment, net:
  Furniture, fixtures, equipment and vehicles ..................................            186              111
  Oil and gas properties, net (full cost method):
    Proved properties ..........................................................          8,902            9,012
    Unproved properties not being amortized ....................................
Investment in Networked Energy LLC, net of impairment reserve of $354 ..........
Investment in Delta Petroleum Corporation ......................................         41,120           39,698
                                                                                  -------------    -------------
    Total assets ...............................................................  $      84,319    $      83,826
                                                                                  =============    =============
                      LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Dividend payable .............................................................  $         346    $         343
  Accounts payable .............................................................            298              749
  Accrued expenses .............................................................            134              906
  Contingent note payable to Dominion Oklahoma Texas Exploration and
   Production, Inc. ............................................................            807
  Accrued taxes on appreciation of marketable securities .......................              1                1
  Asset retirement obligations .................................................              3                3
                                                                                  -------------    -------------
    Total current liabilities ..................................................          1,589            2,002
Net refining liabilities retained ..............................................          2,155            2,404
Asset retirement obligations ...................................................            241              227
Deferred income taxes ..........................................................          5,503            5,170
Other liabilities ..............................................................             37               19
                                                                                  -------------    -------------
    Total liabilities ..........................................................          9,525            9,822
                                                                                  -------------    -------------
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; 11,826,404
   shares issued at December 31, 2004 and 11,781,404 shares issued at
   September 30, 2004 ..........................................................          5,914            5,891
  Additional paid-in capital ...................................................         86,341           85,691
  Accumulated other comprehensive income, net of taxes .........................            288              170
  Retained earnings ............................................................         48,918           48,919
                                                                                  -------------    -------------
                                                                                        141,461          140,671
  Treasury stock at cost - 4,911,020 shares at December 31, 2004 and
   September 30, 2004 ..........................................................        (66,667)         (66,667)
                                                                                  -------------    -------------
    Total stockholders' equity..................................................         74,794           74,004
                                                                                  -------------    -------------
    Total liabilities and stockholders' equity .................................  $      84,319    $      83,826
                                                                                  =============    =============
</TABLE>

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

                                       -2-
<PAGE>

                            CASTLE ENERGY CORPORATION
                      CONSOLIDATED STATEMENTS OF OPERATIONS
              ("$000'S" OMITTED EXCEPT SHARE AND PER SHARE AMOUNTS)
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                               THREE MONTHS ENDED
                                                                                  DECEMBER 31,
                                                                           --------------------------
                                                                              2004           2003
                                                                           -----------    -----------
<S>                                                                        <C>            <C>
Revenue:
  Oil and gas sales ....................................................   $       699
                                                                           -----------
                                                                                   699
                                                                           -----------
Expenses:
  Oil and gas production ...............................................            95
  General and administrative ...........................................           943    $     1,239
  Depreciation, depletion and amortization .............................           129             12
                                                                           -----------    -----------
                                                                                 1,167          1,251
                                                                           -----------    -----------
Operating income (loss) ................................................          (468)        (1,251)
                                                                           -----------    -----------
Other income (expense):
  Interest income ......................................................           140             36
  Other income .........................................................             9
  Equity in income of Delta Petroleum Corporation ......................           842            260
                                                                           -----------    -----------
                                                                                   991            296
                                                                           -----------    -----------
Income (loss) before provision for (benefit of) income taxes ...........           523           (955)
                                                                           -----------    -----------
Provision for (benefit of) income taxes:
  State ................................................................             5              9
  Federal ..............................................................           175            284
                                                                           -----------    -----------
                                                                                   180            293
                                                                           -----------    -----------
Net income (loss) ......................................................   $       343    $    (1,248)
                                                                           ===========    ===========
Net income (loss) per share:
  Basic ................................................................   $       .05    $      (.19)
                                                                           ===========    ===========
  Diluted ..............................................................   $       .05    $      (.19)
                                                                           ===========    ===========

Weighted average number of common and potential dilutive common shares
 outstanding:
  Basic ................................................................     6,892,389      6,592,884
                                                                           ===========    ===========
  Diluted ..............................................................     7,114,870      6,592,884
                                                                           ===========    ===========
</TABLE>

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

                                       -3-
<PAGE>

                            CASTLE ENERGY CORPORATION
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                ("000'S" OMITTED)
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                              THREE  MONTHS ENDED
                                                                                  DECEMBER 31,
                                                                           --------------------------
                                                                              2004           2003
                                                                           -----------    -----------
<S>                                                                        <C>            <C>
Cash flows from (used in) operating activities .........................   $      (575)   $    (1,173)
                                                                           -----------    -----------
Cash flows from investing activities:
  Purchase of furniture, fixture, equipment and vehicles ...............           (85)
                                                                           -----------    -----------
    Net cash provided by (used in) investing activities ................           (85)
                                                                           -----------    -----------
Cash flows from financing activities:
  Proceeds from exercise of stock options ..............................           364
  Dividends paid to stockholders .......................................          (343)          (330)
                                                                           -----------    -----------
    Net cash provided by (used in) financing activities ................            21           (330)
                                                                           -----------    -----------
Net increase (decrease) in cash and cash equivalents ...................          (639)        (1,503)
Cash and cash equivalents - beginning of period ........................        33,742         10,615
                                                                           -----------    -----------
Cash and cash equivalents - end of period ..............................   $    33,103    $     9,112
                                                                           ===========    ===========
</TABLE>

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

                                       -4-
<PAGE>

                            CASTLE ENERGY CORPORATION
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                         AND OTHER COMPREHENSIVE INCOME
                   ("$000'S" OMITTED EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                       YEAR ENDED SEPTEMBER 30, 2004 AND THREE MONTHS ENDED DECEMBER 31, 2004
                                                                                    (UNAUDITED)
                                                     --------------------------------------------------------------------------
                                                                                                                   ACCUMULATED
                                                           COMMON STOCK             ADDITIONAL                        OTHER
                                                     ---------------------------     PAID-IN      COMPREHENSIVE   COMPREHENSIVE
                                                        SHARES         AMOUNT        CAPITAL          INCOME       INCOME(LOSS)
                                                     ------------   ------------   ------------   -------------   -------------
<S>                                                    <C>          <C>            <C>            <C>             <C>
Balance -October 1, 2003 .........................     11,503,904   $      5,752   $     68,532                   $       1,383

Options exercised ................................        277,500            139          1,232
Tax benefit of options exercised .................                                          468
Issuance of additional stock by
 Delta Petroleum Corporation, net of
 $4,595 tax ......................................                                       15,459
Dividends declared ($.20 per share) ..............
Comprehensive income (loss):
  Net income (loss) ..............................                                                $      13,620
  Other comprehensive income (loss):
    Reclassification adjustment, net of
     $649 tax ....................................                                                       (1,153)          (1,153)
    Equity in other comprehensive
     income (loss) of Delta Petroleum
     Corporation, net of $32 tax benefit .........                                                          (60)             (60)
                                                     ------------   ------------   ------------   -------------    -------------
                                                                                                  $      12,407
                                                                                                  =============
Balance - September 30, 2004 .....................     11,781,404          5,891         85,691                              170

Options exercised ................................         45,000             23            341
Tax benefit of options exercised .................                                           56
Issuance of additional stock by
 Delta Petroleum Corporation, net of $142 tax ....                                          253
Dividends declared ($.05 per share) ..............
Comprehensive income (loss):
  Net income (loss) ..............................                                                $         343
  Other comprehensive income (loss):
    Equity in other comprehensive
     income (loss) of Delta Petroleum
     Corporation, net of $67 tax benefit .........                                                          118              118
                                                     ------------   ------------   ------------   -------------    -------------
                                                                                                  $         461
                                                                                                  =============
Balance - December 31, 2004 ......................     11,826,404   $      5,914   $     86,341                   $         288
                                                     ============   ============   ============                    =============

<CAPTION>
                                                         YEAR ENDED SEPTEMBER 30, 2004 AND THREE MONTHS ENDED
                                                                    DECEMBER 31, 2004 (UNAUDITED)
                                                     -----------------------------------------------------------
                                                                          TREASURY STOCK
                                                       RETAINED      ---------------------------
                                                       EARNINGS         SHARES         AMOUNT          TOTAL
                                                     ------------    ------------   ------------    ------------
<S>                                                  <C>                <C>         <C>             <C>
Balance -October 1, 2003 .........................   $     36,643       4,911,020   $    (66,667)   $     45,643

Options exercised ................................                                                         1,371
Tax benefit of options exercised .................                                                           468
Issuance of additional stock by
 Delta Petroleum Corporation, net of
 $4,595 tax ......................................                                                        15,459
Dividends declared ($.20 per share) ..............         (1,344)                                        (1,344)
Comprehensive income (loss):
  Net income (loss) ..............................         13,620                                         13,620
  Other comprehensive income (loss):
    Reclassification adjustment, net of
     $649 tax ....................................                                                        (1,153)
    Equity in other comprehensive
     income (loss) of Delta Petroleum
     Corporation, net of $32 tax benefit .........                                                           (60)
                                                     ------------    ------------   ------------    ------------


Balance - September 30, 2004 .....................         48,919       4,911,020        (66,667)         74,004

Options exercised ................................                                                           364
Tax benefit of options exercised .................                                                            56
Issuance of additional stock by
 Delta Petroleum Corporation, net of $142 tax ....                                                           253
Dividends declared ($.05 per share) ..............           (344)                                          (344)
Comprehensive income (loss):
  Net income (loss) ..............................            343                                            343
  Other comprehensive income (loss):
    Equity in other comprehensive
     income (loss) of Delta Petroleum
     Corporation, net of $67 tax benefit .........                                                           118
                                                     ------------    ------------   ------------    ------------


Balance - December 31, 2004 ......................   $     48,918       4,911,020   $    (66,667)   $     74,794
                                                     ============    ============   ============    ============
</TABLE>

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

                                       -5-
<PAGE>

                   CASTLE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     ("$000'S" OMITTED EXCEPT SHARE AMOUNTS)
                                   (UNAUDITED)

Note 1 - Basis of Preparation

         The unaudited consolidated financial statements of Castle Energy
Corporation (the "Company") included herein have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission ("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 three month period ended December 31, 2004 are not necessarily
indicative of the results that may be expected for the fiscal year ending
September 30, 2005 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, 2004.

         In the opinion of the Company, the unaudited consolidated financial
statements contain all adjustments necessary for a fair statement of the results
of operations for the three month periods ended December 31, 2004 and 2003 and
for a fair statement of financial position at December 31, 2004.

Note 2 - September 30, 2004 Balance Sheet

         The amounts presented in the balance sheet as of September 30, 2004
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, 2004.

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. The Company's refining subsidiaries own no refining assets, have
been inactive for over eight 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. Net refining liabilities retained represent the
remaining liabilities from discontinued refining operations. Such amounts remain
on the consolidated balance sheet pending final resolution.

Note 4 - Environmental Liabilities/Litigation

         ChevronTexaco Litigation

         On August 13, 2002, three subsidiaries of ChevronTexaco filed Cause No.
02-4162-JPG in the United States District Court for the Southern District of
Illinois against the Company, as well as against two inactive subsidiaries of
the Company and three unrelated parties. The lawsuit seeks damages and
declaratory relief under contractual and statutory claims arising from
environmental damage at the now dismantled Indian Refinery. In particular, the
lawsuit claims that the Company is contractually obligated to indemnify and
defend ChevronTexaco against all liability and costs, including lawsuits, claims
and administrative actions initiated by the United States Environmental
Protection Agency ("EPA") and others, that ChevronTexaco has incurred 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

                                       -6-
<PAGE>

                   CASTLE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     ("$000'S" OMITTED EXCEPT SHARE AMOUNTS)
                                   (UNAUDITED)

also seeks costs, damages and declaratory relief against the Company under the
Federal Comprehensive Environmental Response Compensation Liability Act
("CERCLA"), the Oil Pollution Act of 1990 ("OPA") and the Solid Waste Disposal
Act, as amended, ("RCRA").

         History

         In December 1995, Indian Refining Limited Partnership, an inactive
refining subsidiary of the Company ("IRLP") sold its refinery, the Indian
Refinery, to American Western Refining L.P. ("American Western"), an
unaffiliated party. As part of the related purchase and sale agreement, American
Western assumed all environmental liabilities and indemnified IRLP with respect
thereto. Subsequently, American Western filed for bankruptcy and sold large
portions of the Indian Refinery to an outside party pursuant to a bankruptcy
proceeding. The outside party has substantially dismantled the Indian Refinery.
American Western filed a liquidation plan in 2001. American Western anticipated
that the liquidation plan would be confirmed in January 2002 but confirmation
was delayed primarily because of legal challenges by Texaco, and subsequently
ChevronTexaco. American Western's liquidation plan was confirmed in April 2003.
In the plan, IRLP reduced a $5,400 secured claim against American Western to
$800. In exchange the EPA and Illinois EPA entered into an Agreement and
Covenant Not to Sue with IRLP, which extinguished all CERCLA claims against
IRLP. Under the American Western liquidation plan, IRLP received $599 which it
distributed 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

                                       -7-
<PAGE>

                   CASTLE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     ("$000'S" OMITTED EXCEPT SHARE AMOUNTS)
                                   (UNAUDITED)

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

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

         Litigation

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

         On October 25, 2002, the Company filed motions to dismiss as a matter
of law the contractual claims in Texaco's complaint, as well as the OPA and RCRA
claims. At the same time, the Company filed its answer to ChevronTexaco's
lawsuit on the remaining CERCLA claim. A pre-trial scheduling conference was
held May 5, 2003 and on May 8, 2003 two unrelated defendants were dismissed from
the case with prejudice under a stipulation with ChevronTexaco on undisclosed
terms. On June 2, 2003, the Federal District Court denied the Company's motions
to dismiss, following which, on July 9, 2003, the Company filed answers to the
contractual, OPA and RCRA claims. The parties are currently conducting discovery
and depositions. The Company is awaiting a rescheduling of the presumptive trial
date for this case from the Federal District Court caused by the court's crowded
criminal docket. The Company expects to pursue motions for summary judgment
prior to trial.

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

         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


                                       -8-
<PAGE>

                   CASTLE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     ("$000'S" OMITTED EXCEPT SHARE AMOUNTS)
                                   (UNAUDITED)

clean up costs, a sum far in excess of the Company's financial capability. On
the other hand, if the Company were found liable by reason of ChevronTexaco's
statutory claims for contribution and reimbursement under CERCLA and/or OPA, the
Company could be required to pay a percentage of the clean-up costs based on
equitable allocation factors such as comparative time of ownership and
operation, toxicity and amount of hazardous materials released, remediation
funded to date, as well as other factors. Since the Company's subsidiary only
operated the Indian Refinery five years, whereas Texaco operated it over
seventy-five years, the Company would expect that its share of remediation
liability would at a minimum be reduced to an amount proportional to the years
of operation by its subsidiary, although such may not be the case. Additionally,
since Texaco and its subsidiaries intentionally disposed of hazardous wastes on
site at the Indian Refinery while the Company's subsidiary arranged to remove
for offsite destruction and disposal any hazardous wastes it may have generated,
any allocation to the Company and/or its subsidiaries might be further reduced.

         The Company and its special counsel, Reed Smith LLP, do not consider an
unfavorable outcome for the Company in ChevronTexaco's lawsuit to be probable
and the Company intends to vigorously defend itself against all of
ChevronTexaco's claims in the litigation and any lawsuits that may follow. In
addition to the numerous defenses that the Company has against ChevronTexaco's
contractual claim for indemnity, the Company and its special counsel believe
that by the express language of the agreement which ChevronTexaco construes to
create an indemnity, ChevronTexaco has irrevocably elected to forego all rights
of contractual indemnification it might otherwise have had against the Company.

         Contingent Environmental Liabilities

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

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

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

OTHER LITIGATION

         Long Trusts Lawsuit

         In November 2000, the Company and three of its subsidiaries were
defendants in a jury trial in Rusk County, Texas. The plaintiffs in the case,
the Long Trusts, are non-operating working interest owners in certain wells
previously operated by Castle Texas Production Limited Partnership ("CTPLP"), an
inactive exploration and production subsidiary of the Company. The wells were
among those sold to 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,

                                       -9-
<PAGE>

                   CASTLE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     ("$000'S" OMITTED EXCEPT SHARE AMOUNTS)
                                   (UNAUDITED)

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 interest billings plus interest,
attorney's fees and court costs.

         After a three-week trial, the District Court in Rusk County submitted
36 questions to the jury which covered the claims and counterclaim in the
lawsuit. Based upon the jury's answers, the District Court entered judgment on
some of the Long Trusts' claims against the Company and its subsidiaries, as
well as CTPLP's counterclaim against the Long Trusts. The District Court issued
an amended judgment on September 5, 2001 which became final December 19, 2001.
The net amount awarded to the plaintiffs was approximately $2,700.

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

         The Long Trusts subsequently filed a petition for review with the
Supreme Court of Texas. On March 26, 2004, the Texas Supreme Court denied the
Long Trusts petition for review and the Long Trusts filed a petition for
rehearing with that court two weeks later. That petition was also subsequently
denied, whereupon the Court of Appeals issued its mandate on June 9, 2004,
completing the appellate process. Certain breach of contract claims by the Long
Trusts which were reversed and remanded by the appellate court may be retried by
the plaintiffs. Based on the evidence at the initial trial coupled with the
guidance to the trial court given in the appellate decision, the Company
believes that it will be able to prove that there was no breach of contract and
that Long Trusts suffered no damages, and that any such breach of contract
claims, even if decided adversely to the Company, will not result in a material
loss to the Company.

         Pursuant to the mandate of the Texas Court of Appeals, the Company has
now moved to sever CTPLP's claims against the Long Trusts from any retrial of
the Long Trust's contract claims against the Company and to collect on CTPLP's
judgment against the Long Trusts which is secured by a letter of credit posted
by the Long Trusts with the trial court. The Company estimates the judgment to
be in excess of $1,000, including accrued interest, as of December 31, 2004.
Subsequent to June 30, 2004, upon issue of the mandate by the Texas Court of
Appeals, the Company's $3,886 supersedeas bond was released under Texas law. The
Company's $4,110 letter of credit, including accrued interest, securing that
bond was also released and those funds are no longer restricted cash.

         On September 17, 2004, the Long Trusts filed a motion for clarification
with the Court of Appeals which in essence sought to reverse that court's
severance of CTPLP's claims from the retrial of the Long Trusts' breach of
contract claims. The Company has opposed the Long Trusts' motion on a number of
grounds and believes that it has no merit. At the request of the Long Trusts,
the trial court set a trail date for March 14, 2005 to retry the Long Trusts
contract claims, but did not sever the CTPLP's claims as mandated. On
December 3, 2004, the Company filed a Petition for Writ of Mandamus with the
Court of Appeals requesting that the trial court be stayed from proceeding
further, and be ordered to comply with the June mandate of the Court of Appeals.
On January 31, 2005, the Court of Appeals stayed the trial court from proceeding
pending further orders from the Court of Appeals.

                                      -10-
<PAGE>

                   CASTLE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     ("$000'S" OMITTED EXCEPT SHARE AMOUNTS)
                                   (UNAUDITED)

         The Company has not accrued any recoveries for this litigation as of
December 31, 2004, but will record recoveries if and when they are ultimately
realized (collected).

         Pilgreen Litigation

         As part of the oil and gas properties acquired from AmBrit Energy
Corporation ("AmBrit") in June 1999, Castle Exploration Company, Inc., a
wholly-owned subsidiary of the Company ("CECI") acquired a 10.65% overriding
royalty interest ("ORRI") in the Simpson lease in south Texas, including the
Pilgreen #2ST gas well. CECI subsequently transferred that interest to Castle
Texas Oil and Gas Limited Partnership ("CTOGLP"), an indirect wholly-owned
subsidiary. Because the operator suspended revenue attributable to the ORRI from
first production due to title disputes, AmBrit, the previous owner, filed claims
against the operator of the Pilgreen well, and CTOGLP acquired rights in that
litigation with respect to the period after January 1, 1999. In August 2002,
$282 was released to the Company of which $249 was recorded as income by the
Company and the remaining $33 paid to Delta Petroleum Corporation ("Delta").
Because of a claim by Dominion Oklahoma Texas Exploration and Production, Inc.
("Dominion") (see below), a working interest owner in the same well, that
CTOGLP's ORRI in the Simpson lease should be deemed burdened by 3.55% overriding
royalty interest, there is still a title dispute as to approximately $120 of
suspended CTOGLP Pilgreen #2ST production proceeds for the Company's account.
(The Company sold all of its oil and gas assets, including the Pilgreen #2ST
well, to Delta on May 31, 2002 but effective as of October 1, 2001.) 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. The litigation is related to the Dominion litigation (see below).
Accordingly, the Company believes that CTOGLP will prevail in this litigation if
CTOGLP prevails in the Dominion Litigation or that CTOGLP will fail in this
litigation if it fails in the Dominion Litigation. Since the Company has not
recorded any revenue related to the $120 of suspended revenue, it expects to
record $120 of revenue if it prevails, but no expense if it fails in this
litigation.

         CTOGLP, along with several unrealized parties, has also filed suit to
collect production proceeds from an additional well on the Simpson lease in
which CTOLGP had a 5.325% overriding royalty interest suspended by the operator
because of title disputes. The Company intends to contest this matter
vigorously. At the present time, the amount held in escrow applicable to the
additional well attributable to the Company's interest is approximately $66
although approximately $22 of that amount would be subject to Dominion's claims
in the Pilgren Litigation. The Company has not recorded any of the $66 of
suspended revenue as income but will record it as income when and if it is
realized (collected).

         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 currently estimates the amount in controversy to be
approximately $783. Dominion threatened to suspend all revenue payable to the
Company from the Mitchell and Migl-Mitchell to offset its claim. The Company and
Dominion subsequently examined the land and lease documents concerning the
overriding royalty interests. The Company believes that Dominion's title


                                      -11-
<PAGE>

                   CASTLE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     ("$000'S" OMITTED EXCEPT SHARE AMOUNTS)
                                   (UNAUDITED)

exception to CTOGLP's overriding royalty interest is erroneous and notes that
several previous title opinions have confirmed the validity of CTOGLP's
interest.

         In July 2003, Dominion filed a motion for partial summary judgment
concerning the Company's claim that it had assumed the liabilities of its
predecessor in interest and CTOGLP filed its response to Dominion's motion as
well as its own cross motion for partial summary judgment. In September 2003,
the District Court of Lavaca County granted Dominion's partial motion for
partial summary judgment. In January 2004, Dominion filed a motion for final
summary judgment on this matter to which CTOGLP and the other defendants filed a
response. In May 2004, the District Court of Lavaca County granted Dominion's
motion for final summary judgment. The Company has filed an appeal of both the
District Court's summary judgments with the Court of Appeals in Corpus Christi.

         At June 30, 2004, the Company had an accrued provision of $825 related
to this litigation, including $44 in estimated interest and plaintiff's legal
costs. By agreement between Dominion and the Company during the quarter ended
December 31, 2004, CTOGLP executed a promissory note for $783 plus accrued
interest, guaranteed by the Company, to avoid the cost of a supersedeas bond;
such note to be payable only if the Company fails in its appeal. At December 31,
2004, $807 of the amount previously accrued is represented by a contingent note
payable to Dominion and the remaining $18 is included in accrued expenses.

Note 5 - New Accounting Pronouncements

         On September 28, 2004, the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 106 ("SAB No. 106"). SAB No. 106 applies to
companies using the full cost method of accounting for oil and gas properties
and equipment costs, such as the Company. SAB No. 106 affects the way in which
the Company calculates its full cost ceiling limitation (the Company now
excludes the future cash outflows associated with settling asset retirement
obligations related to proved developed properties in the calculation of the
ceiling) and the way the Company calculates depletion on its gas properties
(only asset retirement costs for new recompletions and new wells are now
included in calculating depletion expense). The Company adopted SAB No. 106 on
October 1, 2004. The Company expects the adoption of SAB No. 106 on future
operating costs, operating income (loss) and net income (loss) to be immaterial.

         In December 2004, the FASB issued Statement of Financial Accounting
Standards No. 123 (revised 2004), "Share-Based Payment" ("SFAS No. 123(R)").
SFAS No. 123(R) requires an entity to recognize the grant-date fair value of
stock options and other equity-based compensation issued to employees in the
income statement. SFAS No. 123(R)will be effective for the Company beginning
July 1, 2005. The Company does not expect SFAS No. 123(R)to have a material
impact on its results of operations since all outstanding options are vested.
The Company has not issued any stock options since January 2002.

         In December 2004, the FASB issued FASB Staff Position FAS 109-1,
"Application of FASB Statement No. 109, Accounting for Income Taxes, for the Tax
Deduction Provided to U.S. Based Manufacturers by the American Jobs Creation Act
of 2004" ("FSP 109"). FSP 109 clarifies how to apply Statement No. 109 to the
new tax deduction for income attributable to "domestic production activities."
The Company expects that the new tax deduction will first be effective for the
Company's fiscal year ended September 30, 2006 and that the affect on future
income tax expense, deferred income taxes and income taxes payable will be
immaterial.

                                      -12-
<PAGE>

                   CASTLE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     ("$000'S" OMITTED EXCEPT SHARE AMOUNTS)
                                   (UNAUDITED)

Note 6 - Income Taxes

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

                                                    DECEMBER 31,   SEPTEMBER 30,
                                                        2004            2004
                                                    ------------   -------------
                                                    (UNAUDITED)
         Deferred tax liabilities - gross.........  $      5,503   $       5,170
         Valuation allowance......................
                                                    ------------   -------------
         Deferred tax liabilities - net...........  $      5,503   $       5,170
                                                    ============   =============

         The net deferred tax liabilities at December 31, 2004 and September 30,
2004 relate primarily to a difference between the book value and tax basis of
the Company's investment in Delta.

Note 7 - Restricted Cash

         Restricted cash at both December 31, 2004 and September 30, 2004,
consists of certificates of deposit supporting letters of credit for operating
or drilling bonds provided to state or county regulatory agencies.

Note 8 - Acquisition of Oil and Gas Properties

         On March 31, 2004, the Company acquired interests in 138 western
Pennsylvania gas wells from Delta Petroleum Corporation ("Delta"). The Company
previously owned most of these properties through May 31, 2002 when it sold all
of its United States oil and gas properties to Delta. The purchase price paid by
the Company was effective January 1, 2004 and was reduced by purchase price
adjustments to the closing date of March 31, 2004. For accounting purposes the
Company allocated $43 of the purchase price to trucks and the remainder to oil
and gas properties.

         The Company owned approximately 25% of Delta (see Note 9) at the time
of purchase and three of the Company's directors were and still are also
directors of Delta. Prior to approving the purchase, the Company appointed a
committee of independent directors to evaluate and make a recommendation to the
Board of Directors with respect to the proposed transaction. The Committee
engaged an outside consultant to evaluate the fairness of the proposed purchase.
Based upon that consultant's recommendation that the purchase price was
reasonable and fair and the favorable recommendation of the committee, the full
Board of Directors of the Company unanimously approved the transaction.

         At the same time the Company also purchased another owner's interests
in the same gas properties for $334 subject to similar final closing
adjustments. The other owner's interests in the properties were approximately
four percent of Delta's interests in the same properties.

         On March 30, 2004, the Company acquired interests in 28 western
Pennsylvania gas wells for $1,100 from five limited partnerships effective
January 1, 2004. That transaction closed March 30, 2004. The President of the
general partner of the five selling limited partnerships was and still is an
officer and director of the Company. As a result, the Company appointed a
committee of independent directors to evaluate and make recommendations to the
Board with respect to the proposed transaction. The committee engaged an outside
consultant to evaluate the fairness of the proposed purchase. Based upon that
consultant's opinion that the proposed purchase price was reasonable and fair
and the favorable recommendation of the committee, the full Board of Directors
of the Company unanimously approved the transaction.

                                      -13-
<PAGE>

                   CASTLE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     ("$000'S" OMITTED EXCEPT SHARE AMOUNTS)
                                   (UNAUDITED)

         The final adjusted purchase price for the oil and gas properties
acquired in March 2004 was $8,985.


         Changes in asset retirement obligations associated with the purchase
are as follows:

          Balance-October 1, 2004 ....................         $ 230
          Adjustment .................................            10
          Acretion ...................................             4
                                                               -----
          Balance - December 31, 2004 ................         $ 244
                                                               =====

         The Company's petroleum reservoir engineer estimated the proved
reserves applicable to the three Pennsylvania purchases to be approximately
eight billion cubic feet of natural gas, of which approximately 87% represents
proved producing reserves, while the remaining 13% represents behind pipe and
undeveloped reserves. Approximately 130 of 166 wells in which the Company
acquired interests are operated by the Company. The Company also entered into an
operations management agreement with Delta whereby Delta performed certain well
operations functions for the Company on a transitional basis from April 1, 2004
to September 30, 2004. That agreement terminated September 30, 2004 and the
Company is now performing the well operations functions previously performed by
Delta.

                                      -14-
<PAGE>

                   CASTLE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                     ("$000'S" OMITTED EXCEPT SHARE AMOUNTS)
                                   (UNAUDITED)

Note 9 - Investment in Delta

         Condensed financial information concerning Delta Petroleum Corporation
("Delta") is as follows:

                            CONDENSED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                           DECEMBER 31,   SEPTEMBER 30,
                                                                              2004            2004
                                                                           -----------    ------------
                                                                           (Unaudited)    (Unaudited)
<S>                                                                        <C>            <C>
                                Assets
Current assets .........................................................   $    21,133    $     15,896
Oil and gas properties, net ............................................       303,362         261,907
Other assets ...........................................................         1,605           1,330
                                                                           -----------    ------------
                                                                           $   326,100    $    279,133
                                                                           ===========    ============
                Liabilities and Stockholders' Equity

Current liabilities, including current portion of long-term debt .......   $    23,618    $     15,177
Long-term liabilities and minority interests ...........................        86,198          63,445
Stockholders' equity ...................................................       216,284         200,511
                                                                           -----------    ------------
                                                                           $   326,100    $    279,133
                                                                           ===========    ============
</TABLE>

                       CONDENSED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                           FOR THE THREE MONTHS ENDED
                                                                                   DECEMBER 31,
                                                                           --------------------------
                                                                               2004          2003
                                                                           -----------    -----------
                                                                           (Unaudited)    (Unaudited)
<S>                                                                        <C>            <C>
Revenue:
  Oil and gas sales ....................................................   $    20,441    $     7,714
  Other ................................................................            88            (68)
                                                                           -----------    -----------
                                                                                20,529          7,646
                                                                           -----------    -----------
Expense:
  Lease operating expenses .............................................         4,920          2,242
  General and administrative ...........................................         4,014          1,863
  Depreciation, depletion and amortization .............................         3,678          2,240
  Other ................................................................         1,806            315
                                                                           -----------    -----------
                                                                                14,418          6,660
                                                                           -----------    -----------
Other income (expense) .................................................        (1,302)          (561)
                                                                           -----------    -----------
Discontinued operations - income (loss) ................................                          227
                                                                           -----------    -----------
Income (loss) before income taxes ......................................         4,809            652
Income taxes ...........................................................
                                                                           -----------    -----------
Net income (loss) ......................................................   $     4,809    $       652
                                                                           ===========    ===========
</TABLE>

         The Company currently owns 7,000,000 shares of Delta, or approximately
17%. The Company currently accounts for its investment in Delta on the equity
method as three of the Company's directors are directors of Delta.

                                      -15-
<PAGE>

                   CASTLE ENERGY CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
              ("$000'S" OMITTED EXCEPT SHARE AND PER SHARE AMOUNTS)
                                   (UNAUDITED)

         The above condensed financial information has been compiled using
Delta's unaudited quarterly financial statements for the quarters ended December
31, 2004 and 2003 and September 30, 2004.

         Delta's stock is traded on the Nasdaq stock market under the symbol
"DPTR." At December 31, 2004, the closing price of Delta's common stock was
$15.68 per share.

         At December 31, 2004, there were approximately 4,000,000 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 December 31,
2004, the Company's percentage ownership of Delta would have decreased from
approximately 17.2% to approximately 15.7%.

Note 10 - Compensation Expense

         SFAS 123 allows an entity to continue to measure compensation costs in
accordance with Accounting Principle Board Opinion No. 25 ("APB 25"). The
Company has elected to continue to measure compensation cost in accordance with
APB 25 and to comply with the required disclosure-only provisions of SFAS 123.

         Proforma net income and earnings per share had the Company accounted
for its options under the fair value method of SFAS 123 is as follows:

<TABLE>
<CAPTION>
                                                                THREE MONTHS ENDED
                                                                   DECEMBER 31,
                                                            --------------------------
                                                               2004           2003
                                                            -----------    -----------
         <S>                                                <C>            <C>
         Net income (loss) as reported ..................   $       343    $    (1,248)
         Adjustment required by SFAS 123 ................
                                                            -----------    -----------
         Pro-forma net income (loss) ....................   $       343    $    (1,248)
                                                            ===========    ===========
         Pro-forma net income (loss) per share:
           Basic ........................................   $       .05    $      (.19)
                                                            ===========    ===========
           Diluted ......................................   $       .05    $      (.19)
                                                            ===========    ===========
         Net income (loss) per share as reported:
           Basic ........................................   $       .05    $      (.19)
                                                            ===========    ===========
           Diluted ......................................   $       .05    $      (.19)
                                                            ===========    ===========
</TABLE>

Note 11 - Subsequent Events

         Subsequent to December 31, 2004, a director of the Company exercised
options for 75,000 shares of the Company's common stock, increasing the number
of outstanding shares to 6,990,384. Proceeds from such option exercise were
$323.

                                      -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 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.

         Since November 1996, the Company has reacquired 4,911,020 shares or 69%
of its then outstanding 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 have been the case
if no shares had been repurchased.

         Gas sales increased $699 as a result of the Company's acquisition of
166 Appalachian gas properties on March 30 and 31, 2004 (see Note 8 to the
consolidated financial statements included in this Form 10-Q). The Company owned
no oil and gas properties from September 2002 to March 30, 2004.

         Production expenses increased $95 as a result of the Company's
acquisition of 166 Appalachian gas properties on March 30, and 31, 2004 (see
Note 8 to the consolidated financial statements included in this Form 10-Q). The
Company owned no oil and gas properties from September 2002 to March 30, 2004.

         Depreciation, depletion and amortization increased $117 from the first
quarter of fiscal 2004 to the first quarter of fiscal 2005. The increase was
entirely attributable to depletion of the gas properties acquired by the Company
in March 2004. The Company owned no oil and gas properties from September 2002
to March 30, 2004.

         General and administrative costs decreased $296 or 23.9% from the
quarter ended December 31, 2003 to the quarter ended December 31, 2004. The
decrease was caused primarily by decreased legal expenses. In addition, during
the quarter ended December 31, 2003, the Company recorded an $86 bad debt
provision related to accounts receivable that were then over eighteen months
old. No bad debt provision was recorded for the quarter ended December 31, 2004.

         Interest income increased $104 from the quarter ended December 31, 2003
to the quarter ended December 31, 2004. The increase parallels the increase in
the Company's cash and cash equivalents. At December 31, 2003, cash and cash
equivalents aggregated $9,112 versus $33,103 at December 31, 2004.

                                      -17-
<PAGE>

         The Company's equity in Delta's net income increased $582 or 223% from
the quarter ended December 31, 2003 to the quarter ended December 31, 2004. The
increase was caused by Delta's increased net income, notwithstanding that the
Company's percentage ownership of Delta decreased from approximately 39% at
December 31, 2003 to 17.5% at December 31, 2004.

         The $180 tax provision for the quarter ended December 31, 2004
represented 34% of pre-tax income and approximated the Company's blended
(Federal and state combined) tax rate of 36% The entire tax provision for the
three months ended December 31, 2004 represents deferred income taxes - not
income taxes currently payable.

         The $293 tax provision for the quarter ended December 31, 2003 resulted
primarily because of changes in the Company's expectations concerning future
taxable income.

LIQUIDITY AND CAPITAL RESOURCES

         During the three months ended December 31, 2004, the Company used $575
in operating activities. During the same period the Company paid $343 for
dividends to stockholders. During the same period the Company received $364 in
proceeds from the exercise of stock options. At December 31, 2004, the Company
had $33,103 of unrestricted cash, $32,522 of working capital and no long-term
debt.

         At the present time, the Company's anticipated future cash expenditures
are primarily recurring general and administrative costs, including substantial
legal costs related to the ChevronTexaco litigation (see Item 4 to this Form
10-Q), recurring dividends and lease operating costs related to the Appalachian
gas properties acquired by the Company. In addition, the Company continues to
review possible future acquisitions of oil and gas properties and, if the
Company is successful in such pursuits, additional expenditures would be
required. To the extent that such anticipated expenditures cannot be funded from
cash flow from the Company's oil and gas operations, the Company can fund such
expenditures using its available cash. If the Company were to make another
substantial acquisition in excess of its current cash and other liquid working
capital, the Company believes it could fund such acquisitions by selling
additional shares of Delta or by renewing its previous oil and gas borrowing
arrangements with an energy bank and using the related loan proceeds for the
acquisition.

         The Company's future operations are subject to the following risks:

         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 unrecorded liabilities with respect to
              any of these lawsuits, the Company could incur significant
              liabilities if it ultimately is judged to be liable in these
              lawsuits. This litigation has caused and could continue to cause
              the Company to incur significant legal costs. If ChevronTexaco
              were to prevail on its indemnity claim in its lawsuit (see Item 4
              to this Form 10-Q), the Company could be held liable for the
              entirety of the estimated cleanup costs, a sum far in excess of
              the Company's financial capability.

         b.   Exploration and Production Price Risk - The Company has not hedged
              any of its anticipated future gas production because the cost to
              do so appears excessive when compared to the risk involved. As a
              result, the Company remains exposed to future gas price changes
              with respect to all of its anticipated future gas production. Such
              exposure could be significant given the volatility of gas prices.
              For example, natural gas prices have increased over 50% from 2002
              to 2004 and could either increase or decrease a similar percentage
              in the future. When the Company acquired its gas properties in
              March 2004, the prices being received for natural gas were $5.00
              to $6.00 per mcf sold. The Company paid for its gas reserve
              acquisitions using such pricing. If natural gas prices decrease in
              the future, the decrease will directly impact the Company's gas
              sales, operating income and net income. In addition, if gas prices
              are low at the end of the Company's quarterly and annual reporting
              periods, the value of the Company's gas reserves may decrease such
              that the Company would be forced to record an impairment provision
              - see "Critical Accounting Policies" below.

         c.   Exploration and Production Operating Risk - All of the Company's
              current gas properties are onshore properties with relatively low
              operating risk. Nevertheless, the Company faces the risks


                                      -18-
<PAGE>

              encountered from operating approximately 130 gas wells - including
              the risk of gas leaks, resulting environmental damage, third party
              liability claims related to operations, including claims by
              landowners where the operated wells are located, as well as
              general operating risks.

         d.   Public Market for the Company's Stock - Although there presently
              exists a market for the Company's stock, such market is volatile
              and the Company's stock is thinly traded. This volatility may
              adversely affect the market price and liquidity of the Company's
              common stock.

         e.   Other Risks - In addition to the specific risks noted above, the
              Company is subject to general business risks, including insurance
              claims in excess of insurance coverage, tax liabilities resulting
              from tax audits and the risks associated with increased litigation
              generally.

         f.   Market Value of Delta Stock - The Company currently owns 7,000,000
              shares of Delta. At December 31, 2004, the market value of such
              shares was approximately $110,000 and constituted the largest
              asset of the Company. In the past year Delta's stock price has
              increased significantly and fluctuated significantly over short
              periods of time. If Delta's stock price decreases significantly -
              especially at a time when the Company expects to liquidate some or
              all of its Delta stock - the Company would be adversely affected.

         g.   Future of the Company - Although the Company has recently acquired
              interests in 166 gas wells in Pennsylvania (see Note 9), the
              Company is smaller than most of its competitors which benefit from
              better fixed cost efficiencies than the Company given their larger
              sizes and revenues. The Company's fixed costs (computer system,
              technical skills, field offices, public company compliance costs,
              etc.) have consumed and are expected to continue to consume a
              greater percentage of the Company's oil and gas revenues than do
              those of most of its larger competitors unless the Company is able
              to make additional future acquisitions at favorable prices. Upon
              resolution of the Company's outstanding litigation - whether by
              settlement or judgment - the Company's directors may consider
              options to liquidate the Company or merge the Company into another
              company to maximize stockholder value. If such were the case, the
              Company would face risks concerning the value of the Delta shares
              it owns, tax risks and risks in the liquidation of its assets.

CRITICAL ACCOUNTING POLICIES:

         The accounting policies critical to the Company are as follows:

EQUITY METHOD OF ACCOUNTING

         At December 31, 2004, the Company owned 17.2% of Delta and accounted
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
$4,000 at December 31, 2004. The Company has allocated such excess to Delta's
ownership interests in offshore California leases due to the 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 the
future in Delta could become impaired and the Company would then be required to
recognize the impairment. In addition, since the Company only owns 17.2% of
Delta currently, it is possible that the Company may commence accounting for its
investment in Delta as a marketable security if management considers the
Company's influence on Delta to be less than significant. Although the Company's
interest in Delta has decreased below 20%, the Company has continued to account
for its investment in Delta using the equity method because three of the
Company's directors currently comprise one-third of Delta's directors and thus
the Company can be deemed to still exercise significant influence on Delta. If
the Company's influence in Delta continues to decrease to a level at which it no
longer is considered to have a significant influence, the Company would record
its investment as a marketable security using the provisions of SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities."

                                      -19-
<PAGE>

DISCONTINUED REFINING OPERATIONS

         At December 31, 2004, the Company had recorded net refining liabilities
retained of $2,155. As noted in Item 4 to 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 do not consider an
unfavorable and final outcome for the Company in ChevronTexaco's lawsuit to be
probable, the Company would be required to record additional environmental
liabilities if it becomes probable that the Company will incur liabilities
related to ChevronTexaco's claims and/or other environmental liabilities and
such liabilities exceed $2,155. As noted above, if such liabilities exceed the
value of the Company's assets, the Company would not have the financial
capability to pay such liabilities. The amounts and classification of the
estimated values of discontinued net refining assets and net refining
liabilities retained could change significantly in the future as a result of
litigation or other factors.

INVESTMENT IN NETWORK

         At March 31, 2003, the Company recorded a $480 impairment provision
related to its investment in Network. This provision consisted of $354 provision
related to the Company's 45% equity investment in Network and a $126 provision
related to the Company's $126 note receivable from Network. As a result of these
impairment provisions, the Company's investment in Network was reduced to zero.
The impairment provisions were recorded because Network had not entered into any
revenue generating contracts by that date. Subsequently, Network entered into
its first revenue producing contract and recorded net income of $34 for the
quarter ended December 31, 2004. If Network is able to enter into additional
revenue-generating contracts and generate future net income, the Company may
commence recording its share of Network's future net income under the equity
method of accounting once the Company's share of such income has exceeded the
Company's share of unrecorded Network losses since March 31, 2003, the date that
the Company ceased recognizing its share of Network's losses.

FULL COST METHOD OF ACCOUNTING FOR OIL AND GAS PROPERTIES

         The Company follows the full-cost method of accounting for oil and gas
properties and equipment costs. Under this method of accounting, net capitalized
costs, less related deferred income taxes, in excess of the present value of net
future cash inflows (oil and gas sales less production expenses) from proved
reserves, tax effected and discounted at 10%, and the cost of properties not
being amortized, if any, are charged to expense (full cost ceiling test). If at
a future reporting date oil and gas prices decline, it is possible that the
Company's book value will exceed the allowable full cost ceiling and the Company
would have to write down its oil and gas properties. Even if oil and gas prices
subsequently increase, the write down would not be restored under the full cost
method of accounting. Although the Company recorded no full cost ceiling
provision through December 31, 2004, it could be required to record such a
provision in the future - especially if there were a significant decrease in gas
prices by the end of a quarterly or annual financial reporting period.

         See "New Accounting Pronouncements."

                                      -20-
<PAGE>

ITEM 3.  QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK

         On March 30 and 31, 2004, the Company acquired interests in
Pennsylvania gas wells (see Note 8). The Company has not hedged its share of the
expected natural gas production from these wells. As a result, the Company
remains at risk with respect to such unhedged expected production. If market
prices increase, gas sales applicable to the unhedged production will increase.
If market prices decrease, gas sales and the gross margin related to such
unhedged production will decrease.

         At December 31, 2004, the Company owned 7,000,000 shares of Delta. The
stock price of Delta has fluctuated significantly in the last three years and
thus the market value of the Company's investment in Delta remains subject to
significant changes in the market price of Delta stock.

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 December 31, 2004
are as follows:

         a)   They have concluded that the Company's disclosure controls and
              procedures are effective in ensuring that information required to
              be disclosed by the Company in the reports it files or submits
              under the Securities Exchange Act of 1934, as amended, is
              recorded, processed, summarized and reported within the time
              periods specified in the rules and forms of the SEC.

         b)   There were no significant changes in the Company's internal
              controls during the quarter ended December 31, 2004 that have
              materially affected, or are reasonably likely to materially
              affect, the Company's internal control over financial reporting.

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

         Effective September 30, 2005, the Company expects that it will be
subject to certain attestation requirements concerning the effectiveness of its
internal controls pursuant to the Section 404 of the Sarbanes Oxley Act. These
requirements include management's documenting and testing the Company's internal
controls and attesting as to their effectiveness and a reporting by the
Company's independent accountants concerning management's attestation.

         Although the Company is working diligently to comply with these
requirements, the Company has only eleven employees and these employees work at
four widely scattered locations. The Company's small number of employees and
their geographical separation is expected to make compliance with Section 404 -
especially with segregation of duty control requirements - very difficult and
cost ineffective, if not impossible.

         While the SEC had indicated it may issue supplementary regulations
easing the burden of Section 404 requirements for small entities like the
Company, such regulations have not yet been issued.

                                      -21-
<PAGE>

                           PART II. OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

         For additional information regarding lawsuits, reference is made to
Item 3 of the Company's Form 10-K (Annual Report) for the fiscal year ended
September 30, 2004. Also see Note 4 to the December 31, 2004 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     Report dated January 21, 2005 concerning
                                        Discussion and Appointment of
                                        Independent Accountants

                                      -22-
<PAGE>

                                   SIGNATURES

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


         Date: February 11, 2005                 CASTLE ENERGY CORPORATION


                                                 /s/Richard E. Staedtler
                                                 ------------------------------
                                                 Richard E. Staedtler
                                                 Chief Financial Officer
                                                 Chief Accounting Officer
                                      -23-