<PAGE>

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-QSB

                 [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2006
                                       or
                 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                           COMMISSION FILE NO. 0-12641

                          DALRADA FINANCIAL CORPORATION
             (Exact name of registrant as specified in its charter)

                  Delaware                                       38-3713274
(State or other jurisdiction of                               (IRS Employer ID
incorporation or organization)                                      Number)

                          9449 BALBOA AVENUE, SUITE 210
                               SAN DIEGO, CA 92123
                    (Address of principal executive offices)

               Registrant's telephone number, including area code:
                                 (858) 427 8700

                                       N/A
             (Former name and address, if changed since last report)

Check 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 past 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 [ ]

The number of shares outstanding of the registrant's common stock as of February
15, 2007 was 4,970,066.

Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). (Check one): Yes [ ] No [X]

Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]





<PAGE>


PART I - FINANCIAL INFORMATION
                                                                            Page
ITEM 1.  Consolidated Financial Statements

     Consolidated Balance Sheet - December 31, 2006 (unaudited)                2

     Consolidated Statements of Operations - three and six months ended
           December 31, 2006 and 2005 (unaudited)                              3

     Consolidated Statement of Stockholders' Deficit -- six months ended
          December 31, 2006 (unaudited)                                        4

     Consolidated Statements of Cash Flows - six months ended
           December 31, 2006 and 2005 (unaudited)                              5

     Notes to Consolidated Financial Statements (unaudited)                    6

ITEM 2.  Management's Discussion and Analysis or Plan of Operations           18

ITEM 3.  Controls and Procedures                                              24

PART II - OTHER INFORMATION                                                   25

ITEM 1.  Legal Proceedings                                                    25

ITEM 2.  Unregistered Sale of Equity Securities and Use of Proceeds           26

ITEM 3.  Defaults Upon Senior Securities                                      26

ITEM 4.  Submission of Matters To A Vote of Security Holders                  26

ITEM 5.  Other Information                                                    26

ITEM 6.  Exhibits                                                             26

SIGNATURES                                                                    26

CERTIFICATIONS





<PAGE>


PART I. - FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

                 DALRADA FINANCIAL CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEET
                                DECEMBER 31, 2006
                                   (unaudited)

<TABLE>
<S>            <C>
                      DALRADA FINANCIAL CORPORATION AND SUBSIDIARIES

                                Consolidated Balance Sheet
                            (in thousands, except share data)

                                                                              December 31,
                                                                                 2006
                                                                               ---------
                                                                              (unaudited)
       ASSETS

CURRENT ASSETS
      Cash and cash equivalents                                                $   2,023
      Accounts receivable, net of allowance of $248                                9,410
      Debt issue costs                                                               249
      Other current assets                                                         1,847
                                                                               ---------
TOTAL CURRENT ASSETS                                                              13,529
                                                                               ---------

CUSTOMER LIST, net of accumulated amortization of $164                               852
PROPERTY AND EQUIPMENT, net of accumulated depreciation of $431                      714
WORKER'S COMPENSATION DEPOSIT                                                      3,009
INVESTMENT IN ALLIANCE INSURANCE GROUP                                             1,400
RECEIVABLE FROM RELATED PARTY                                                      1,400
OTHER LONG-TERM ASSETS                                                               932
                                                                               ---------
TOTAL ASSETS                                                                   $  21,836
                                                                               =========


            LIABILITIES AND STOCKHOLDERS' DEFICIT

CURRENT LIABILITIES
      Notes payable, current portion                                               2,108
      Line of Credit                                                                 500
      Accounts payable                                                             1,620
      PEO payroll taxes and other payroll deductions                               8,666
      Accrued payroll and related payroll taxes and deductions                    17,353
      Other accrued expenses                                                       4,583
      Warrant liability                                                            4,746
      Accrued derivative liability                                                 2,465
                                                                               ---------
TOTAL CURRENT LIABILITIES                                                         42,041
                                                                               ---------

CONVERTIBLE DEBENTURES, net of discounts of $4,895                                 4,220
NOTES PAYABLE, net of current portion (includes related party note of $100)          503
                                                                               ---------
TOTAL LIABILITIES                                                                 46,764
                                                                               ---------

MINORITY INTEREST                                                                    550

COMMITMENTS AND CONTINGENCIES                                                         --

STOCKHOLDERS' DEFICIT
      Series A convertible, redeemable preferred stock, $1,000 par value,
        7,500 shares authorized 420.5 shares issued and outstanding                  420
      Common stock; $0.005 par value; 1,000,000,000 shares
        authorized; 4,970,066 shares issued and outstanding                           25
      Common stock warrants                                                          475
      Additional paid-in capital                                                  87,014
      Prepaid consulting                                                            (170)
      Accumulated deficit                                                       (113,242)
                                                                               ---------
TOTAL STOCKHOLDERS' DEFICIT                                                      (25,478)
                                                                               ---------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT                                    $  21,836
                                                                               =========


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

                                            2




<PAGE>

                                  DALRADA FINANCIAL CORPORATION AND SUBSIDIARIES
                                       CONSOLIDATED STATEMENTS OF OPERATIONS
                                                 DECEMBER 31, 2006
                                                    (unaudited)


                                  DALRADA FINANCIAL CORPORATION AND SUBSIDIARIES

                        Consolidated Statements of Operations and Other Comprehensive Loss
                                         (in thousands, except share data)

                                                             Three Months                    Six Months
                                                      ---------------------------     ---------------------------
                                                      December 31,    December 31,    December 31,    December 31,
                                                         2006            2005            2006            2005
                                                      -----------     -----------     -----------     -----------
                                                      (unaudited)     (unaudited)     (unaudited)     (unaudited)
REVENUES
      Temporary staffing services                     $    33,515     $    17,002     $    66,597     $    28,545
      PEO Services                                         25,237             387          28,230             682
      Products and other                                      196             445           1,079             636
                                                      -----------     -----------     -----------     -----------
TOTAL REVENUES                                             58,948          17,834          95,906          29,863
                                                      -----------     -----------     -----------     -----------

COST OF REVENUES
      Cost of temporary staffing                           29,103          14,477          59,138          25,303
      Cost of PEO services                                 24,649             299          27,004             653
      Cost of products and other                                9               7              20              18
                                                      -----------     -----------     -----------     -----------
TOTAL COST OF REVENUES                                     53,761          14,783          86,162          25,974
                                                      -----------     -----------     -----------     -----------

                                                      -----------     -----------     -----------     -----------
GROSS PROFIT                                                5,187           3,051           9,744           3,889
                                                      -----------     -----------     -----------     -----------

OPERATING EXPENSES
      Selling, general and administrative                   4,213           2,537           8,085           4,208
                                                      -----------     -----------     -----------     -----------
TOTAL OPERATING EXPENSES                                    4,213           2,537           8,085           4,208
                                                      -----------     -----------     -----------     -----------

INCOME (LOSS) FROM OPERATIONS                                 974             514           1,659            (319)
                                                      -----------     -----------     -----------     -----------

OTHER INCOME (EXPENSES):
      Interest expense                                     (1,822)           (140)         (3,089)           (564)
      Note payable settlement                                  --            (316)             --            (316)
      Penalties and interest                                   --            (294)             --            (567)
      Gain on extinguishment of debt                          257           4,262             608           5,603
      Change in derivative and warrant liabilities            329              --          (2,590)             --
      Other, net                                              (15)           (187)             13            (158)
                                                      -----------     -----------     -----------     -----------
TOTAL OTHER INCOME (EXPENSE)                               (1,251)          3,325          (5,058)          3,998
                                                      -----------     -----------     -----------     -----------

INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES
      AND DISCONTINUED OPERATIONS                            (277)          3,839          (3,399)          3,679

PROVISION FOR INCOME TAXES                                     --              --              --              --

INCOME (LOSS) BEFORE MINORITY INTEREST AND
                                                      -----------     -----------     -----------     -----------
      DISCONTINUED OPEATIONS                                 (277)          3,839          (3,399)          3,679
                                                      -----------     -----------     -----------     -----------

MINORITY INTEREST IN SUBSIDIARY (INCOME)                     (402)             --            (550)             --
                                                      -----------     -----------     -----------     -----------
NET INCOME (LOSS) FROM CONTINUING OPERATIONS                 (679)          3,839          (3,949)          3,679
                                                      -----------     -----------     -----------     -----------

DISCONTINUED OPERATION:
      Loss from discontinued operation                         --            (420)            (22)           (520)
                                                      -----------     -----------     -----------     -----------
                                                               --            (420)            (22)           (520)
                                                      -----------     -----------     -----------     -----------

NET INCOME (LOSS)                                            (679)          3,419          (3,971)          3,159

OTHER COMPREHENSIVE INCOME (LOSS)
      Foreign currency translation                             --               3              --              --
                                                      -----------     -----------     -----------     -----------
COMPREHENSIVE INCOME (LOSS)                                  (679)          3,422          (3,971)          3,159
                                                      ===========     ===========     ===========     ===========

PREFERRED STOCK DIVIDENDS                                      (5)             (5)            (10)            (10)

NET INCOME (LOSS) ATTRIBUTED TO COMMON
                                                      -----------     -----------     -----------     -----------
      STOCKHOLDERS                                    $      (684)    $     3,414     $    (3,981)    $     3,149
                                                      ===========     ===========     ===========     ===========

EARNINGS (LOSS) PER SHARE - BASIC
      Continuing operations                           $     (0.14)    $      0.99     $     (0.80)    $      0.96
      Discontinued operations                                  --           (0.11)          (0.00)          (0.14)
                                                      -----------     -----------     -----------     -----------
                                                      $     (0.14)    $      0.88     $     (0.81)    $      0.83
                                                      ===========     ===========     ===========     ===========
WEIGHTED AVERAGE COMMON EQUIVALENT
      SHARES OUSTANDING - BASIC                         4,919,911       3,859,135       4,918,983       3,807,985
                                                      ===========     ===========     ===========     ===========


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

                                                         3




<PAGE>


                                           DALRADA FINANCIAL CORPORATION AND SUBSIDIARIES
                                           CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
                                                (IN THOUSANDS, EXCEPT PER SHARE DATA)
                                                             (unaudited)



                                           DALRADA FINANCIAL CORPORATION AND SUBSIDIARIES

                                           Consolidated Statement of Stockholders' Deficit
                                                  (in thousands, except share data)
                                                             (Unaudited)

                                                                              Common   Additional
                              Series A Preferred Stock     Common Stock       Stock      Paid-in    Prepaid  Accumulated
                                 Shares      Amount     Shares     Amount    Warrants    Capital   Consulting  Deficit     Total
                                ---------  ---------  ----------  ---------  ---------  ---------  ---------  ---------  ---------
Balance, June 30, 2006              420.5        420   4,920,066         25        475     86,976       (245)  (109,271)   (21,620)

Amortization of prepaid consulting                                                                        75                    75
Common stock issued for:
     Conversion of notes payable                          50,000         --                    38                               38

Net loss                                                                                                         (3,971)    (3,971)
                                ---------  ---------  ----------  ---------  ---------  ---------  ---------  ---------  ---------
Balance, December 31, 2006          420.5  $     420   4,970,066         25  $     475  $  87,014  $    (170) $(113,242) $ (25,478)
                                =========  =========  ==========  =========  =========  =========  =========  =========  =========

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

                                                                  4






<PAGE>


                            DALRADA FINANCIAL CORPORATION AND SUBSIDIARIES
                                 CONSOLIDATED STATEMENTS OF CASH FLOW
                                              (unaudited)

                            DALRADA FINANCIAL CORPORATION AND SUBSIDIARIES

                                 Consolidated Statements of Cash Flows
                                   (in thousands, except share data)

                                                                               Six Months Ended
                                                                          ---------------------------
                                                                          December 31,    December 31,
                                                                             2006            2005
                                                                          -----------     -----------
                                                                          (uanudited)     (uanudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
    Net income (loss) from continuing operations                          $    (3,949)    $     3,679
    Adjustment to reconcile net income (loss) to net cash
      provided by operating activities
         Depreciation and amortization                                            174              57
         Stock issued for services                                                 --              15
         Amortization of prepaid consulting                                        75              --
         Amortization of debt discounts                                         2,069              58
         Change in value of warrant and accrued derivative liabilities          2,590              --
         Gain on extinguishment of debt                                          (608)         (5,603)
         Minority interest                                                        550              --
    Changes in operating assets and liabilities:
    (Increase) decrease in:
      Accounts receivable                                                      (6,418)           (816)
      Prepaid worker's compensation premiums                                       --             269
      Other current assets                                                      1,649          (1,399)
      Worker's compensation deposit                                               432             496
      Other assets                                                               (713)             (4)
    Increase (decrease) in:
      Accounts payable and accrued expenses                                    (1,127)          4,903
      Accrued payroll and related payroll taxes and deductions                  8,050              --
      PEO liabilities                                                             215           1,292
                                                                          -----------     -----------
Net cash provided by operating activities from continuing operations            2,989           2,947
Net cash used in operating activities from discontinued operations                 --            (432)
                                                                          -----------     -----------
Net cash provided by operating activities                                       2,989           2,515
                                                                          -----------     -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
    Cash acquired with (paid for) acquisition                                    (178)             --
    Purchase of furniture and equipment                                           (38)            (68)
                                                                          -----------     -----------
Net cash used in investing activities from continuing operations                 (216)            (68)
Net cash used in investing activities from discontinued operations                 --              --
                                                                          -----------     -----------
Net cash used in investing activities                                            (216)            (68)
                                                                          -----------     -----------

CASH FLOWS FROM FINANCING ACTIVITIES:
    Change in cash overdraft, net                                                  --             410
    Line of credit, net                                                            --              20
    Proceeds from notes payable                                                    --             821
    Repayments of notes payable                                                (4,010)         (2,581)
    Repayment of borrowings under bank notes payable                             (483)
    Repayments of capital lease obligations                                        --              (4)
                                                                          -----------     -----------
Net cash used in financing activities from continuing operations               (4,010)         (1,817)
Net cash used in financing activities from discontinued operations                 --              --
                                                                          -----------     -----------
Net cash used in financing activities                                          (4,010)         (1,817)
                                                                          -----------     -----------

EFFECT OF EXCHANGE RATE CHANGES ON CASH                                            --              --
                                                                          -----------     -----------

NET INCREASE (DECREASE) IN CASH AND
    CASH EQUIVALENTS                                                           (1,237)            630

CASH AND CASH EQUIVALENTS, Beginning of period                                  3,260             171
                                                                          -----------     -----------

CASH AND CASH EQUIVALENTS, End of period                                  $     2,023     $       801
                                                                          ===========     ===========

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

                                                   5



<PAGE>
                        DALRADA FINANCIAL CORPORATION AND SUBSIDIARIES

                       Consolidated Statements of Cash Flows, Continued
                               (in thousands, except share data)

                                                                       Six Months Ended
                                                                   --------------------------
                                                                   December 31,   December 31,
                                                                      2006           2005
                                                                   -----------    -----------
                                                                   (uanudited)    (uanudited)

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
    Interest paid                                                  $        --    $        --
                                                                   ===========    ===========
    Income taxes paid                                              $        --    $        --
                                                                   ===========    ===========


SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITIES:
    Conversion of convertible debentures into common stock         $        --    $        50
                                                                   ===========    ===========
    Conversion of accounts payable and accrued liabilities into
      common stock                                                 $        --    $        29
                                                                   ===========    ===========

    Net assets acquired in business combinations:
      Cash                                                         $        72    $        --
      Receivables                                                        1,781             --
      Other current assets                                                 477             --
      Property and equipment                                               384             --
      Worker's compensation deposit                                        369             --
      Customer list                                                        377             --
      Other assets                                                         205             --
      Accounts payable                                                      30             --
      Accrued expenses                                                   2,397             --
      Line of credit                                                       500             --
      Notes payable                                                        238             --

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

                                               6
</TABLE>




<PAGE>

                 DALRADA FINANCIAL CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
                        (IN THOUSANDS, EXCEPT SHARE DATA)

NOTE 1. BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements of Dalrada
Financial Corporation and Subsidiaries (the "Company" or "DFCO") have been
prepared pursuant to the rules of the Securities and Exchange Commission (the
"SEC") for quarterly reports on Form 10-QSB and do not include all of the
information and note disclosures required by accounting principles generally
accepted in the United States of America. These financial statements and notes
herein are unaudited, but in the opinion of management, include all the
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of the Company's financial position, results of operations,
and cash flows for the periods presented. These financial statements should be
read in conjunction with the Company's audited financial statements and notes
thereto for the year ended June 30, 2006 included in the Company's annual report
on Form 10-KSB filed with the SEC. Interim operating results are not necessarily
indicative of operating results for any future interim period or for the full
year ended June 30, 2007. The consolidated financial statements include the
accounts of the Company and its majority-owned subsidiaries. All inter-company
transactions have been eliminated.

MINORITY INTEREST
-----------------

On April 1, 2005, the Company contributed its wholly-owned subsidiary, Solvis
Group, Inc. a Michigan corporation, to QPI, an 85%-owned subsidiary of the
Company. QPI subsequently changed its name to The Solvis Group, Inc., a Nevada
corporation ("Solvis"). In the consolidated statement of operations, the Company
has only recognized the minority interests' share of the net loss to the extent
of the minority interest recorded on the consolidated balance sheet. Solvis had
net income for the six months ended December 31, 2006 of which 15% or $661 is
attributed to minority interest. The net income attributed to minority interest
for the six months ended December 31, 2006 of $550 that has been separately
designated in the accompanying statement of operations is the current year net
income related to minority interest of $661 offset by the unrecorded loss of
$111 from the year ended June 30, 2006.

STOCK SPLIT
-----------

On September 15, 2006, the Company authorized a one for two hundred (1 for 200)
reverse stock split of its common stock. There was no change made to the par
value of the Company's common stock. All share information for common shares has
been retroactively restated for this reverse stock split.

RECLASSIFICATIONS
-----------------

Certain reclassifications have been made to the prior years' financial
statements to conform to the current year presentation. These reclassifications
had no effect on previously reported results of operations or retained earnings.

COMPREHENSIVE INCOME
--------------------

The Company has adopted SFAS No. 130, "Reporting Comprehensive Income." SFAS No.
130 establishes standards for reporting and presentation of comprehensive income
and its components in a full set of financial statements. During the six months
ended December 31, 2006, the Company had no elements of comprehensive income.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
-----------------------------------------

In May 2005, the Financial Accounting Standards Board ("FASB") issued SFAS No.
154, "Accounting Changes and Error Corrections." This statement applies to all
voluntary changes in accounting principle and requires retrospective application
to prior periods' financial statements of changes in accounting principle,
unless this would be impracticable. This statement also makes a distinction
between "retrospective application" of an accounting principle and the
"restatement" of financial statements to reflect the correction of an error.
This statement is effective for accounting changes and corrections of errors
made in fiscal years beginning after December 15, 2005. SFAS No. 154 is not
expected to have a material effect on the financial position or results of
operations of the Company.

                                      7



<PAGE>

In February 2006, FASB issued SFAS No. 155, "Accounting for Certain Hybrid
Financial Instruments". SFAS No. 155 amends SFAS No 133, "Accounting for
Derivative Instruments and Hedging Activities", and SFAS No. 140, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities". SFAS No. 155, permits fair value remeasurement for any hybrid
financial instrument that contains an embedded derivative that otherwise would
require bifurcation, clarifies which interest-only strips and principal-only
strips are not subject to the requirements of SFAS No. 133, establishes a
requirement to evaluate interest in securitized financial assets to identify
interests that are freestanding derivatives or that are hybrid financial
instruments that contain an embedded derivative requiring bifurcation, clarifies
that concentrations of credit risk in the form of subordination are not embedded
derivatives, and amends SFAS No. 140 to eliminate the prohibition on the
qualifying special-purpose entity from holding a derivative financial instrument
that pertains to a beneficial interest other than another derivative financial
instrument. This statement is effective for all financial instruments acquired
or issued after the beginning of the Company's first fiscal year that begins
after September 15, 2006. SFAS No. 155 is not expected to have a material effect
on the financial position or results of operations of the Company.

In March 2006 FASB issued SFAS 156 `Accounting for Servicing of Financial
Assets' this Statement amends FASB Statement No. 140, ACCOUNTING FOR TRANSFERS
AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES, with
respect to the accounting for separately recognized servicing assets and
servicing liabilities. This Statement:

     1.   Requires an entity to recognize a servicing asset or servicing
          liability each time it undertakes an obligation to service a financial
          asset by entering into a servicing contract.

     2.   Requires all separately recognized servicing assets and servicing
          liabilities to be initially measured at fair value, if practicable.

     3.   Permits an entity to choose 'Amortization method' or 'Fair value
          measurement method' for each class of separately recognized servicing
          assets and servicing liabilities:

     4.   At its initial adoption, permits a one-time reclassification of
          available-for-sale securities to trading securities by entities with
          recognized servicing rights, without calling into question the
          treatment of other available-for-sale securities under Statement 115,
          provided that the available-for-sale securities are identified in some
          manner as offsetting the entity's exposure to changes in fair value of
          servicing assets or servicing liabilities that a servicer elects to
          subsequently measure at fair value.

     5.   Requires separate presentation of servicing assets and servicing
          liabilities subsequently measured at fair value in the statement of
          financial position and additional disclosures for all separately
          recognized servicing assets and servicing liabilities.


This Statement is effective as of the beginning of the Company's first fiscal
year that begins after September 15, 2006. Management believes that this
statement will not have a significant impact on the financial statements.

In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements." This
statement clarifies the definition of fair value, establishes a framework for
measuring fair value and expands the disclosures on fair value measurements.
SFAS No. 157 is effective for fiscal years beginning after November 15, 2007.
Management has not determined the effect, if any, the adoption of this statement
will have on the financial statements.

                                      8



<PAGE>

In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans-an amendment of FASB
Statements No. 87, 88, 106, and 132(R)". One objective of this standard is to
make it easier for investors, employees, retirees and other parties to
understand and assess an employer's financial position and its ability to
fulfill the obligations under its benefit plans. SFAS No. 158 requires employers
to fully recognize in their financial statements the obligations associated with
single-employer defined benefit pension plans, retiree healthcare plans, and
other postretirement plans. SFAS No. 158 requires an employer to fully recognize
in its statement of financial position the overfunded or underfunded status of a
defined benefit postretirement plan (other than a multiemployer plan) as an
asset or liability and to recognize changes in that funded status in the year in
which the changes occur through comprehensive income. This Statement also
requires an employer to measure the funded status of a plan as of the date of
its year-end statement of financial position, with limited exceptions. SFAS No.
158 requires an entity to recognize as a component of other comprehensive
income, net of tax, the gains or losses and prior service costs or credits that
arise during the period but are not recognized as components of net periodic
benefit cost pursuant to SFAS No. 87. This Statement requires an entity to
disclose in the notes to financial statements additional information about
certain effects on net periodic benefit cost for the next fiscal year that arise
from delayed recognition of the gains or losses, prior service costs or credits,
and transition asset or obligation. The Company is required to initially
recognize the funded status of a defined benefit postretirement plan and to
provide the required disclosures for fiscal years ending after December 15,
2006. Management believes that this statement will not have a significant impact
on the financial statements.

NOTE 2. GOING CONCERN CONSIDERATIONS

The accompanying unaudited consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. For the six months
ended December 31, 2006, the Company had a net loss of $3,971. As of December
31, 2006, the Company had a working capital deficiency of $28,512 and had a
stockholders' deficit of $25,478. In addition, the Company is delinquent on
payroll tax obligations and has been sued by trade creditors for nonpayment of
amounts due. The Company is also delinquent in its payments relating to payroll
tax liabilities. These conditions raise substantial doubt about its ability to
continue as a going concern. Management believes that it can continue to raise
debt and equity financing to support its operations.

The Company must obtain additional funds to provide adequate working capital and
finance operations. However, there can be no assurance that the Company will be
able to complete any additional debt or equity financings on favorable terms or
at all, or that any such financings, if completed, will be adequate to meet the
Company's capital requirements. Any additional equity or convertible debt
financings could result in substantial dilution to the Company's stockholders.
If adequate funds are not available, the Company may be required to delay,
reduce or eliminate some or all of its planned activities. The Company's
inability to fund its capital requirements would have a material adverse effect
on the Company. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.

NOTE 3. STOCK BASED COMPENSATION

The Company adopted SFAS No. 123 (Revised 2004), SHARE BASED PAYMENT ("SFAS No.
123R"), under the modified-prospective transition method on January 1, 2006.
SFAS No. 123R requires companies to measure and recognize the cost of employee
services received in exchange for an award of equity instruments based on the
grant-date fair value. Share-based compensation recognized under the
modified-prospective transition method of SFAS No. 123R includes share-based
compensation based on the grant-date fair value determined in accordance with
the original provisions of SFAS No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION, for all share-based payments granted prior to and not yet vested
as of January 1, 2006 and share-based compensation based on the grant-date
fair-value determined in accordance with SFAS No. 123R for all share-based
payments granted after January 1, 2006. SFAS No. 123R eliminates the ability to
account for the award of these instruments under the intrinsic value method
prescribed by Accounting Principles Board ("APB") Opinion No. 25, ACCOUNTING FOR
STOCK ISSUED TO EMPLOYEES, and allowed under the original provisions of SFAS No.
123. Prior to the adoption of SFAS No. 123R, the Company accounted for our stock
option plans using the intrinsic value method in accordance with the provisions
of APB Opinion No. 25 and related interpretations.

For periods presented prior to the adoption of SFAS No. 123R, pro forma
information regarding net loss and loss per share as required by SFAS No. 123R
has been determined as if the Company had accounted for its employee stock
options under the original provisions of SFAS No. 123. The fair value of these
options was estimated using the Black-Scholes option pricing model. For purposes
of pro forma disclosure, the estimated fair value of the options is amortized to
expense over the option's vesting period. The pro forma information regarding
the effect on operations that is required by SFAS 123 has not been presented
since there is no pro forma expense to be shown for the six months ended
December 31, 2005. There were no options granted during the six months ended
December 31, 2006

                                      9



<PAGE>

NOTE 4. EARNINGS (LOSS) PER COMMON SHARE

The Company reports earnings (loss) per share in accordance with SFAS No. 128,
"Earnings per Share." Basic earnings (loss) per share are computed by dividing
income (loss) available to common stockholders by the weighted average number of
common shares available. Diluted earnings (loss) per share is computed similar
to basic earnings (loss) per share except that the denominator is increased to
include the number of additional common shares that would have been outstanding
if the potential common shares had been issued and if the additional common
shares were dilutive. The following potential common shares have been excluded
from the computation of diluted net loss per share for the six months ended
December 31, 2006: warrants - 7,330,000 and stock options - nil. All warrants
are anti-dilutive at December 31, 2006 since the Company incurred a net loss.




<PAGE>

Basic and diluted loss per share are the same for the six months ended December
31, 2006. Below is the computation of basic and diluted earnings per share:

<TABLE>
<S>                                     <C>
                                                                    THREE MONTHS ENDED DECEMBER 31,
                                             ------------------------------------------------------------------------------
                                                             2006                                     2005
                                             --------------------------------------    ------------------------------------
                                             INCOME/                        PER        INCOME/                       PER
                                              (LOSS)        SHARES         SHARE        (LOSS)       SHARES         SHARE

BASIC EARNINGS (LOSS) PER SHARE

Net income (loss) from continuing
  operations                                 $    (679)                                $   3,839
Preferred stock dividends                           (5)                                       (5)
                                             ---------                                 ---------
                                                  (684)                                    3,834
Discontinued operations                             --                                      (420)
                                             ---------                                 ---------
Net income (loss) attributed to common
  stockholders                               $    (684)                                $   3,414
                                             =========                                 =========

Weighed shares outstanding                                4,919,911                                3,859,135

  Continuing operations                                                  $   (0.14)                               $    0.99
  Discontinued operations                                                $      --                                    (0.11)
                                                                         ---------                                ---------
                                                                         $   (0.14)                               $    0.88
                                                                         =========                                =========

DILUTED EARNINGS (LOSS) PER SHARE

Net income (loss) from continuing
  operations                                                 N/A                       $   3,839
Preferred stock dividends                                                                     (5)
Interest on convertible debentures                                                            30
Amortization of discounts on convertible debentures                                           28
                                                                                       ---------
                                                                                           3,892
Discontinued operations                                                                     (420)
                                                                                       ---------
Net income (loss) attributed to common stockholders                                    $   3,472
                                                                                       =========

Weighed shares outstanding                                                                         3,859,135
Conversion of convertible debentures into common
  stock                                                                                            3,048,980
                                                                                                  ----------
                                                                                                   6,908,115
                                                                                                  ==========
  Continuing operations                                                                                           $    0.56
  Discontinued operations                                                                                         $   (0.06)
                                                                                                                  ---------
                                                                                                                  $    0.50
                                                                                                                  =========

                                      10




<PAGE>


                                                                     SIX MONTHS ENDED DECEMBER 31,
                                             ------------------------------------------------------------------------------
                                                             2006                                     2005
                                             --------------------------------------    ------------------------------------
                                             INCOME/                        PER        INCOME/                       PER
                                              (LOSS)        SHARES         SHARE        (LOSS)       SHARES         SHARE

BASIC EARNINGS (LOSS) PER SHARE

Net income (loss) from continuing
  operations                                 $  (3,949)                                $   3,679
Preferred stock dividends                          (10)                                      (10)
                                             ---------                                 ---------
                                                (3,959)                                    3,669
Discontinued operations                            (22)                                     (520)
                                             ---------                                 ---------
Net income (loss) attributed to common
  stockholders                               $  (3,981)                                $   3,149
                                             =========                                 =========

Weighed shares outstanding                                4,918,983                                3,807,985
  Continuing operations                                                  $   (0.80)                               $    0.96
  Discontinued operations                                                $   (0.00)                               $   (0.14)
                                                                         ----------                               ---------
                                                                         $   (0.81)                               $    0.83
                                                                         ==========                               =========


DILUTED EARNINGS (LOSS) PER SHARE

Net income (loss) from continuing
  operations                                                   N/A                     $   3,679
Preferred stock dividends                                                                    (10)
Interest on convertible debentures                                                            60
Amortization of discounts on convertible debentures                                           58
                                                                                       ---------
                                                                                           3,787
Discontinued operations                                                                     (520)
                                                                                       ---------
Net income (loss) attributed to common stockholders                                    $   3,267
                                                                                       =========

Weighed shares outstanding                                                                         3,807,985
Conversion of convertible debentures into common
  stock                                                                                            3,048,980
                                                                                                  ----------
                                                                                                   6,856,965
                                                                                                  ==========
  Continuing operations                                                                                           $    0.55
  Discontinued operations                                                                                         $   (0.08)
                                                                                                                  ---------
                                                                                                                  $    0.48
                                                                                                                  =========
</TABLE>


NOTE 5. ACQUISITION

On September 12, 2006, DFCO acquired all the outstanding stock for All Staffing
Inc., a Tennessee corporation for $500 in cash and note payable and a warrant to
purchase 450,000 shares to DFCO's stock, to be valued at $3,000 36 months after
issuance (closing), subject to adjustment.

All Staffing Inc, established in 1991, is a Professional Employer Organization
(PEO) located in Lansford, PA. The Company has clients in PA, NJ and NY. All
Staffing provides comprehensive outsourcing of human resource and benefit
administration, as well as payroll and tax processing as a co-employer with its
client companies. All Staffing will undertake certain employment processes and
administration for the benefit of all the Dalrada Financial companies.

The operating results of All Staffing beginning September 12, 2006 are included
in the accompanying consolidated statements of operations.

                                      11



<PAGE>

The total purchase price was valued at $500 and is summarized as follows in
accordance with SFAS No. 141 and 142:

Cash                                                     $          72
Accounts receivable                                              1,781
Other current assets                                               477
Property and equipment                                             384
Worker's compensation deposit                                      369
Customer list                                                      377
Other assets                                                       205
Accounts payable                                                  (30)
Accrued expenses                                               (2,397)
Line of credit                                                   (500)
Notes payable                                                    (238)
                                                         ------------
Purchase price                                           $        500
                                                         ============

The customer list is being amortized over 48 months.


NOTE 6. CONVERTIBLE DEBT FINANCING AND DERIVATIVE LIABILITIES

In accordance with SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," as amended ("SFAS 133"), the holder's conversion right
provision, interest rate adjustment provision, liquidated damages clause, cash
premium option, and the redemption option (collectively, the debt features)
contained in the terms governing the Notes are not clearly and closely related
to the characteristics of the Notes. Accordingly, the features qualified as
embedded derivative instruments at issuance and, because they do not qualify for
any scope exceptions within SFAS 133, they were required by SFAS 133 to be
accounted for separately from the debt instrument and recorded as derivative
financial instruments.

During the six months ended December 31, 2006, we recorded an other expense item
of $982 and $1,608, which relates to the convertible debt features and warrants,
respectively, to reflect the change in fair value of the derivative liability.

At each balance sheet date, we adjust the derivative financial instruments to
their estimated fair value and analyze the instruments to determine their
classification as a liability or equity. As of December 31, 2006, the estimated
fair value of our derivative liability was $2,465, as well as a warrant
liability of $4,746..

NOTES PAYABLE

During the year ended June 30, 2006, the Company issued notes to third parties,
which included eight investors. As part of the several financing transactions,
the Company also issued warrants to purchase shares of stock at various exercise
prices.

<TABLE>
Date of Note                Amount of Notes      Conversion Price(1)      Term of Note
------------                ---------------      -------------------      ------------
<S>     <C>
January 27, 2006 (1)              $     112           $    0.452             2 years
February 9, 2006 (1)              $     246           $    0.452             2 years
February 13, 2006                 $   7,545               75% (3)            2 years


Date of Warrants Issued     Number of Warrants     Exercise Price     Term of Warrants
-----------------------     ------------------     --------------     ----------------

February 13, 2006                 6,760,000          $     1.00            7 years
February 13, 2006 (2)               520,000          $     1.00            7 years
May 1, 2006 (4)                      50,000          $    20.00            7 years
</TABLE>

(1) = no warrants issued with this financing transaction.
(2) = no debt associated with these warrants.
(3) = 75% of 20-day pre-conversion market-based price.
(4) = warrants issued in connection with SSL acquisition

The notes contain provisions on interest accrual at the "prime rate" published
in The Wall Street Journal from time to time, plus three percent (3%). The
Interest Rate shall not be less than fifteen percent (15%). Interest shall be
calculated on a 360 day year. Interest on the Principal Amount shall be payable
monthly, commencing 120 days from the closing and on the first day of each
consecutive calendar month thereafter (each, a "Repayment Date") and on the
Maturity Date.

Following the occurrence and during the continuance of an Event of Default (as
discussed in the Note), the annual interest rate on the Note shall automatically
be increased by two percent (2%) per month until such Event of Default is cured.

                                      12



<PAGE>

The Notes also provide for liquidated damages on the occurrence of several
events. During the six months ended December 31, 2006, the Company has recorded
an expense of $508 as a non-registration penalty.

Debt features. The Holder shall have the right, but not the obligation, to
convert all or any portion of the then aggregate outstanding Principal Amount of
this Note, together with interest and fees due hereon, into shares of Common
Stock.

The proceeds from the financing transactions were allocated to the debt features
and to the warrants based upon their fair values. After the latter allocations,
the remaining value, if any, is allocated to the Note on the financial
statements.

The debt discount is being accreted using the effective interest method over the
term of the note.

The value of the discount on the converted notes on the books is being accreted
over the term of the note (two years). For the six months ended December 31,
2006, the Company accreted $1,959, of debt discount related to the Notes.

WARRANTS ISSUED

The estimated fair value of the warrants at issuance were as follows:

<TABLE>
Date of Warrants Issued      Number of Warrants     Value at Issuance     Volatility Factor
-----------------------      ------------------     -----------------     -----------------
<S>      <C>
February 13, 2006                  6,760,000            $    3,582                   72%
February 13, 2006                    520,000            $      302                   72%
</TABLE>

These amounts have been classified as a derivative instrument and recorded as a
liability on the Company's balance sheet in accordance with current
authoritative guidance. The estimated fair value of the warrants was determined
using the Black-Scholes option-pricing model with a closing price of on the date
of issuance and the respective exercise price, a 7.0 year term, and the
volatility factor relative to the date of issuance. The model uses several
assumptions including: historical stock price volatility (utilizing a rolling
120 day period), risk-free interest rate (3.50%), remaining time till maturity,
and the closing price of the Company's common stock to determine estimated fair
value of the derivative liability. In valuing the warrants at December 31, 2006,
the Company used the closing price of $0.71, the respective exercise price, as
well as the remaining term on each warrant, as well as a volatility of 140%. In
accordance with the provisions of SFAS No. 133, Accounting for Derivative
Instruments, the Company is required to adjust the carrying value of the
instrument to its fair value at each balance sheet date and recognize any change
since the prior balance sheet date as a component of Other Income (Expense). The
warrant derivative liability at December 31, 2006, had increased to a fair value
of $4,746, due in part to an increase in the market value of the Company's
common stock to $0.71 from $0.15 at June 30, 2006 amount, as well as an increase
in the volatility from 90% to 140% which resulted in other expense of $1,608 on
the Company's books.

The recorded value of such warrants can fluctuate significantly based on
fluctuations in the market value of the underlying securities of the issuer of
the warrants, as well as in the volatility of the stock price during the term
used for observation and the term remaining for the warrants.

DEBT FEATURES

In accordance with Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities," as amended
("SFAS 133"), the debt features provision (collectively, the features) contained
in the terms governing the Notes are not clearly and closely related to the
characteristics of the Notes. Accordingly, the features qualified as embedded
derivative instruments at issuance and, because they do not qualify for any
scope exception within SFAS 133, they were required by SFAS 133 to be accounted
for separately from the debt instrument and recorded as derivative financial
instruments.

                                      13



<PAGE>

Pursuant to the terms of the Notes, these notes are convertible at the option of
the holder, at anytime on or prior to maturity. There is an additional interest
rate adjustment feature, a liquidated damages clause, a cash premium option, as
well as the redemption option. The debt features represents an embedded
derivative that is required to be accounted for apart from the underlying Notes.
At issuance of the Notes, the debt features had an estimated initial fair value
as follows, which was recorded as a discount to the Notes and a derivative
liability on the consolidated balance sheet.

                                            Debt Features
Date of Note           Amount of Notes    Value at Issuance    Carrying Value
------------           ---------------    -----------------    --------------

January 27, 2006         $      112           $       69           $       43
February 9, 2006         $      246           $      133           $      113
February 13, 2006        $    7,545           $    2,515           $    1,448

In subsequent periods, if the price of the security changes, the embedded
derivative financial instrument related to the debt features will be adjusted to
the fair value with the corresponding charge or credit to other expense or
income. In valuing the debt features at December 31, 2006, the company used the
closing price of $0.71 and the respective conversion price, a remaining term
coinciding with each contract, and a volatility of 0%. For the six months ended
December 31, 2006, due in part to an increase in the market value of the
Company's common stock to $0.71 the Company recorded other expense on the
consolidated statement of operations for the change in fair value of the debt
features of approximately $982. At December 31, 2006, the estimated fair value
of the debt features was approximately $2,465.

The recorded value of the debt features related to the Notes can fluctuate
significantly based on fluctuations in the fair value of the Company's common
stock, as well as in the volatility of the stock price during the term used for
observation and the term remaining for the warrants.

The significant fluctuations can create significant income and expense items on
the financial statements of the Company.

Because the terms of the convertible notes ("notes") require such
classification, the accounting rules required additional convertible notes and
non-employee warrants to also be classified as liabilities, regardless of the
terms of the new notes and / or warrants. This presumption has been made due to
the company no longer having the control to physical or net share settle
subsequent convertible instruments because it is tainted by the terms of the
notes. Were the notes to not have contained those terms or even if the
transactions were not entered into, it could have altered the treatment of the
other notes and the conversion features of the latter agreement may have
resulted in a different accounting treatment from the liability classification.
The notes and warrants, as well as any subsequent convertible notes or warrants,
will be treated as derivative liabilities until all such provisions are settled.

For the six months ended December 31, 2006, we recorded other expense of $1,608
and $982, related to the increase in value of the debt features and warrants. A
tabular reconciliation of this adjustment follows:

For the six months ended December 31, 2006:

         $ 1,608        expense, increase in value of warrant liability
         $   982        expense, increase in value of derivative liability
         -------
         $ 2,590        other expense related to convertible debt

For the six months ended December 31, 2006, the Company recorded $1,959 of
interest expense related to the accretion of debt related to the convertible
financing.

For the six months ended December 31, 2006:

         $ 1,959        of interest expense related to accretion of convertible
         -------          debt
         $ 1,959        of interest expense related to convertible debt

The balance of the carrying value of the convertible debt as of December 31,
2006 is:

         $ 1,605        original carrying value on convertible debt
         $  (228)       converted to equity
         $ 2,843        accretion of convertible debt
         ------
         $ 4,220        December 31, 2006 carrying value of debt

                                      14



<PAGE>

The balance of the carrying value of the derivative liability as of December 31,
2006 is:

         $ 2,717        original value of derivative liability
         $(1,234)       income, decrease in value of derivative liability
         -------
         $ 1,483        June 30, 2006 value of derivative liability
         $   982        expense, increase in value of derivative liability
         ------
         $ 2,465        December 31, 2006 value of derivative liability

The balance of the carrying value of the warrant liability as of December 31,
2006 is:

         $ 3,892        original carrying value of warrant liability
         $ (754)        income, decrease in value of warrant liability
         ------
         $ 3,138        June 30, 2006 value of warrant liability
         $ 1,608        expense, increase in value of warrant liability
         ------
         $ 4,746        December 31, 2006 value of warrant liability

NOTE 7. NOTES PAYABLE

The following summarizes notes payable (including amounts due to a related
party) at December 31, 2006:
<TABLE>
<S>                                                                            <C>
Note payable in connection with All Staffing acquisition                       $     250
Notes payable to related party                                                       100
Note payable to investor, interest at 10% per quarter, payable upon demand            70
Note payable to bank related to financing of worker's compensation deposit,
  interest at 7.5%, payable over 10 months through March 2007                         638
Note payable to a former director                                                     750
Note payable to individuals assumed with acquisition of All Staffing                  238
Other                                                                                 565
                                                                               ----------
                                                                                    2,611
Less current portion                                                               (2,108)
                                                                               ----------
Long-term portion                                                              $      503
                                                                               ==========
</TABLE>

NOTE 8. STOCKHOLDERS' DEFICIENCY

STOCK ISSUANCES

During the six months ended December 31, 2006, the Company issued 50,000 shares
of stock for the settlement of certain notes payable.

COMMON STOCK WARRANTS

The following is a summary of the warrant activity:
<TABLE>
<S>            <C>
                                                                       UNDERLYING COMMON
                                                 PRICE PER SHARE             SHARES
                                               --------------------    -------------------

JUNE 30, 2006                                    $1.00 - $20.00             7,330,000
     Granted                                            -                           -
     Exercised                                          -                           -
     Canceled                                           -                           -
                                                                       -------------------
EXERCISABLE AT DECEMBER 31, 2006                                            7,330,000
                                                                       -------------------
</TABLE>


The weighted average remaining contractual life of warrants outstanding at
December 31, 2006 is 6.10 years. The intrinsic value of the outstanding warrants
at December 31, 2006 was $0. The exercise prices for warrants outstanding at
December 31, 2006 are as follows:

                            NUMBER OF             EXERCISE
                            WARRANTS                PRICE
                         ----------------    --------------------
                               7,280,000                   $1.00
                                  50,000                  $20.00
                         ----------------
                               7,330,000
                         ================

                                      15



<PAGE>

Stock Option Activity

The following is a summary of the stock option activity:

                                              STOCK OPTION PLANS
                                                              UNDERLYING
                                         PRICE PER              COMMON
                                           SHARE                SHARES
                                     -------------------   -----------------

JUNE 30, 2005                          $2.00 - $5.00             135,000
         Granted                             -                         -
         Exercised                           -                         -
         Canceled/Expired              $2.00 - $5.00            (135,000)
                                                           -----------------
EXERCISABLE AT DECEMBER 31, 2006                                       -
                                                           -----------------


The Company has implemented SFAS 123R for future grants of options to employees.
No unvested option grants to employees were outstanding at December 31, 2006.

NOTE 9. SEGMENT INFORMATION

The Company managed and internally reported the Company's business has four
reportable segments, principally, (1) temporary staffing, (2) PEO services, (3)
products, and (4) corporate. Segment information for the six months ended
December 31, 2006 is as follows:

<TABLE>
<S>                 <C>
Six months ended December 31, 2006
----------------------------------

                          TEMPORARY
                          STAFFING          PEO SERVICE          PRODUCTS           CORPORATE             TOTAL
                          --------          -----------          --------           ---------             -----

Revenues                    $66,597             $28,230             $1,079                  $0            $95.906
Operating                     4,623                (13)              (178)             (2,773)              1,659
income (loss)


Six months ended December 31, 2005
----------------------------------

                          TEMPORARY
                          STAFFING         PEO SERVICE           PRODUCTS           CORPORATE              TOTAL
                          --------         -----------           --------           ---------              -----

Revenues                    $28,545                $682               $631                  $5            $29,863
Operating                     1,543                  53            (1,881)                (34)              (319)
income (loss)
</TABLE>


NOTE 10. RELATED PARTY TRANSACTIONS

WARNING MANAGEMENT SERVICES, INC.

The Company's CEO and Chairman, Mr. Brian Bonar, is also the Chairman of Warning
Management Services, Inc. Warning a public company, located in Southern
California. Warning's operations consist of a modeling agency and providing
temporary staffing services to government agencies and private companies.

ADMINISTRATIVE PAYROLL SERVICE AGREEMENT WITH WARNING

In September, 2006, the Company entered into a new Agreement to provide
Administrative Payroll Services to Employment Systems, Inc., ("ESI") a wholly
owned subsidiary of Warning. For the six months ended December 31, 2006 and
2005, the Company invoiced ESI for services rendered of $298 and $274,
respectively.

NOTE 11. LITIGATION

The Company and its SourceOne Group ("SOG") subsidiary have been sued by the
Arena Football 2 Operating Company, LLC ("Arena") in Wayne County Circuit Court,
Michigan. In April 2006, Dalrada and SourceOne Group, Inc. entered into a
settlement with AF2 Operating Company, LLC and other parties involved in the
matter of AF2 Operating Company, LLC v. SourceOne Group Inc., et al. The net
result of the settlement was that Dalrada and SourceOne Group, Inc. are
obligated to make a net settlement payment of $203.

                                      16



<PAGE>

The Company and SOG have been sued by Liberty Mutual Insurance Company
("Liberty") in the United States District Court for the Northern District of
Illinois. The initial claim by Liberty was estimated by Liberty to be $829 and
is now claimed to exceed $1,000. In July 2006, the judge dismissed Dalrada from
the litigation and dismissed many, but not all, of the claims against SourceOne
Group. Management has vigorously contested the claims made by Liberty. Trial is
scheduled for January 2007.

On March 17, 2005, Greenland Corporation ("Plaintiff"), filed an amended
complaint in the Superior Court of California, County of San Diego, Case No.
GIC842605, against the Company and multiple other individuals and entities
resulting from a transaction as evidenced by the "Agreement to Acquire Shares"
dated August 9, 2002, whereby the Company obtained a controlling equity interest
in Plaintiff. Plaintiff contends that the Company engaged in various forms of
wrongdoing including breach of fiduciary duty, conversion, conspiracy and aiding
and abetting. The Company has filed a cross-complaint alleging various causes of
action against Plaintiff and its officers, directors and/or managing agents
including Thomas J. Beener, Gene Cross, George Godwin, and Edward Sano. The
subject cross-complaint seeks pecuniary and punitive damages resulting from
various fraudulent transactions as well as legal malpractice against Mr. Beener.
In July 2006, the matter was settled with Dalrada paying $150 of legal fees
incurred by Greenland.

On August 29, 2005, United Bank & Trust filed suit against the Company and other
parties. The allegations of the lawsuit are that the Company guaranteed certain
debt owed by InfoServices, Inc. and is liable in the amount of $678. The Company
has settled this matter and at December 31, 2006, the remaining amount due is
$236.

The Company was in a dispute with former creditors regarding the amount of debt
converted into common stock. These creditors were seeking damages totaling $316.
The Company proposed a settlement in the amount of $316, based on the advice of
the Company's legal counsel. Consequently, $316 was charged to operations in the
accompanying financial statements for the year ended June 30, 2006. The
plaintiffs have accepted the settlement offer.

NOTE 12. GAIN ON SETTLEMENT OF DEBT

During the six months ended December 31, 2006 and 2005, the Company recognized a
gain on settlement of debt of $608 and $5,603, respectively, which resulted
primarily from the write off of stale accounts payable and judgments and the
settlement of certain notes payable. The Company, based upon an opinion provided
by independent legal counsel, has been released as the obligator of these
liabilities. Accordingly, management has elected to adjust its accounts payable
and to classify such adjustments as settlement of debt.

NOTE 13. DISCONTINUED OPERATIONS

In November 2005, the Company determined to discontinue operations of Master
Staffing, its executive recruiting division. The decision was based on the
Master Staffing lack of ability to generate sufficient revenue and the Company's
lack of expertise in the executive recruiting business. The Company is
completely exiting the executive recruiting business. The Company plans to wind
down the operations of Master Staffing and close its only office over the next
few months.

For the six months ended December 31, 2005, Master Staffing's revenues were $11
and losses from operations were $256. The results of operations of Master
Staffing have been reported separately as discontinued operations.


                                      17



<PAGE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS


                        (in thousands, except share data)

The following discussion and analysis should be read in conjunction with the
consolidated financial statements and notes thereto included on Form 10-KSB for
the year ended June 30, 2006. The statements contained in this Report on Form
10-QSB that are not purely historical are forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, including statements
regarding our expectations, hopes, intentions or strategies regarding the
future. Forward-looking statements include statements regarding: future product
or product development; future research and development spending and our product
development strategies, and are generally identifiable by the use of the words
"may", "should", "expect", "anticipate", "estimates", "believe", "intend", or
"project" or the negative thereof or other variations thereon or comparable
terminology. Forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause our actual results, performance
or achievements (or industry results, performance or achievements) expressed or
implied by these forward-looking statements to be materially different from
those predicted. The factors that could affect our actual results include, but
are not limited to, the following: general economic and business conditions,
both nationally and in the regions in which we operate; competition; changes in
business strategy or development plans; our inability to retain key employees;
our inability to obtain sufficient financing to continue to expand operations;
and changes in demand for products by our customers.

OVERVIEW

We provide financial and human resource management services, including staffing
services and PEO services. Staffing services revenues are generated primarily
from short-term staffing, contract staffing, and on-site management. PEO service
fees are generated from contractual agreements with clients under which we act
as a co-employer of our client's workforce with responsibility for some or all
of the client's human resource functions. We recognize revenues from our
staffing services for all amounts invoiced, including direct payroll, employer
payroll-related taxes, workers' compensation coverage and an administrative
fee). PEO service fee revenues are recognized on a net basis in accordance with
Emerging Issues Task Force No.99-19, "REPORTING REVENUES GROSS AS A PRINCIPAL
VERSUS NET AS AN AGENT " ("EITF No.99-19"). Therefore PEO service fee revenues
represent the gross margin generated from our PEO services after deducting the
amounts invoiced to PEO customers for direct payroll expenses such as salaries,
wages, health insurance and employee out-of-pocket expenses incurred incidental
to employment. These amounts are also excluded from cost of revenues. PEO
service fees also include amounts invoiced to our clients for employer
payroll-related taxes and workers' compensation coverage.

Our business is conducted in California, Michigan, Colorado, Pennsylvania and
Texas. In addition to seeking new markets, we expect to derive most of our
revenues from our current markets for the near term. Any weakness in economic
conditions or changes in the regulatory environments in these regions could have
a material adverse effect on our financial results.

Our services and products are marketed through our operating divisions and
subsidiaries. PEO services are marketed by Dalrada Financial Services (formerly
Strategic Staff Leasing), and All Staffing (acquired subsequent to year -end).
Our staffing services revenues are obtained by: Heritage Staffing and our Solvis
subsidiary (which includes CallCenterHR, Solvis Medical Staffing, and Solvis
Home Health Care).

Our business continues to experience some liquidity problems. Accordingly,
year-to-year comparisons may be of limited usefulness as our business continues
to experience rapid growth.

Our current strategy is to expand our financial service business, including
staff leasing, PEO services, and value added products and services to small and
medium-size businesses.

To successfully execute our current strategy, we will need to improve our
working capital position. The report of our independent auditors accompanying
our June 30, 2006 financial statements included in Form 10KSB for the year ended
June 30, 2006 includes an explanatory paragraph indicating there is a
substantial doubt about our ability to continue as a going concern, due
primarily to a working capital deficiency and negative net worth, which is
exacerbated by our losses in prior years. In addition, we are late in our filing
of payroll tax returns for certain of our PEO divisions and are delinquent on
the payment of payroll tax withholdings. We plan to overcome the circumstances
that impact our ability to remain a going concern through a combination of
achieving profitability and renegotiating existing obligations. In addition, we
continue to work with the Internal Revenue Service and State taxing Authorities
to reconcile and resolve all open accounts and issues.

                                      18



<PAGE>

We have sought to reduce our debt through debt to equity conversions. In
February 2006 we issued promissory notes for $7,545, which consisted of a
rolling over of approximate $2,545 in existing debt and $5,000 in cash. The
proceeds were used primarily to pay off promissory notes, convertible note debt,
factoring debt, and other debt and to establish collateral backed ACH credit
lines.

There can be no assurance that we will be able to complete any additional debt
or equity financings on favorable terms or at all, or that any such financings,
if completed, will be adequate to meet our capital requirements. Any additional
equity or convertible debt financings could result in substantial dilution to
our shareholders. If adequate funds are not available, we may be required to
delay, reduce or eliminate some or all of our planned activities, including any
potential mergers or acquisitions. Our inability to fund our capital
requirements would have a material adverse effect on the Company.

SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES

Discussion and Analysis of Financial Condition and Results of Operations discuss
our consolidated financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States of America.
The preparation of these consolidated financial statements requires us to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. On an
on-going basis, we evaluate our estimates and judgments, including those related
to allowance for doubtful accounts, value of intangible assets and valuation of
non-cash compensation. We base our estimates and judgments on historical
experiences and on various other factors that we believe to be reasonable under
the circumstances, the results of which form the basis for making judgments
about the carrying value of assets and liabilities that are not readily apparent
from other sources. Actual results may differ from these estimates under
different assumptions or conditions. The most significant accounting estimates
inherent in the preparation of our consolidated financial statements include
estimates as to the appropriate carrying value of certain assets and liabilities
which are not readily apparent from other sources, primarily allowance for
doubtful accounts, estimated fair value of equity instruments used for
compensation, estimated tax liabilities from PEO operations and estimated
liabilities associated with worker's compensation liabilities. These accounting
policies are described at relevant sections in this discussion and analysis and
in the notes to the consolidated financial statements included elsewhere in this
Form l0-KSB.

REVENUE RECOGNITION

PEO SERVICE FEES AND WORKSITE EMPLOYEE PAYROLL COSTS

We recognize our revenues associated with our PEO business pursuant to EITF
99-19 "Reporting Revenue Gross as a Principal versus Net as an Agent." Our
revenues are reported net of worksite employee payroll cost (net method).
Pursuant to discussions with the Securities and Exchange Commission staff, we
changed our presentation of revenues from the gross method to an approach that
presents our revenues net of worksite employee payroll costs (net method)
primarily because we are not generally responsible for the output and quality of
work performed by the worksite employees.

In determining the pricing of the markup component of the gross billings, we
take into consideration our estimates of the costs directly associated with our
worksite employees, including payroll taxes, benefits and workers' compensation
costs, plus an acceptable gross profit margin. As a result, our operating
results are significantly impacted by our ability to accurately estimate,
control and manage our direct costs relative to the revenues derived from the
markup component of our gross billings.

Consistent with our revenue recognition policy, our direct costs do not include
the payroll cost of our worksite employees. Our direct costs associated with our
revenue generating activities are comprised of all other costs related to our
worksite employees, such as the employer portion of payroll-related taxes,
employee benefit plan premiums and workers' compensation insurance premiums.

TEMPORARY STAFFING

We record gross revenue for temporary staffing. We have concluded that gross
reporting is appropriate because we (i) have the risk of identifying and hiring
qualified employees, (ii) have the discretion to select the employees and
establish their price and duties and (iii) bear the risk for services that are
not fully paid for by customers. Temporary staffing revenues are recognized when
the services are rendered by our temporary employees. Temporary employees placed
by us are our legal employees while they are working on assignments. We pay all
related costs of employment, including workers' compensation insurance, state
and federal unemployment taxes, social security and certain fringe benefits. We
assume the risk of acceptability of our employees to our customers.

                                      19



<PAGE>

WORKERS' COMPENSATION RESERVES

We are self-insured for workers' compensation coverage in a majority of our PEO
and staffing employees up to $250 per occurrence and up to an aggregate total of
$4 million for plan year 2006, ended April 30, 2006, and up to $6 million for
plan year ending April 30, 2007. Accruals for workers' compensation expense are
made based upon our claims experience and a quarterly independent actuarial
analysis, utilizing past experience, as well as claim cost development trends
and current workers' compensation industry loss information. We believe the
amount accrued is adequate to cover all known and unreported claims at December
31, 2006. However, if the actual costs of such claims and related expenses
exceed the amount estimated, additional reserves may be required, which could
have a material adverse effect on our operating results.

ALLOWANCE FOR DOUBTFUL ACCOUNTS

We are required to make estimates of the collectibility of accounts receivables.
Management analyzes historical bad debts, customer concentrations, customer
creditworthiness, current economic trends and changes in the customers' payment
tendencies when evaluating the adequacy of the allowance for doubtful accounts.
If the financial condition of our customers deteriorates, resulting in an
impairment of their ability to make payments, additional allowances may be
required.

INTANGIBLE ASSETS AND GOODWIL

We assess the recoverability of intangible assets and goodwill annually and
whenever events or changes in circumstances indicate that the carrying value
might be impaired. Factors that are considered include significant
underperformance relative to expected historical or projected future operating
results, significant negative industry trends and significant change in the
manner of use of the acquired assets. Management's current assessment of the
carrying value of intangible assets and goodwill indicates there was no
impairment as of December 31, 2006. If these estimates or their related
assumptions change in the future, we may be required to record impairment
charges for these assets.

SALES OF PRODUCTS

Revenue is recognized when earned. Our revenue recognition policies are in
compliance with all applicable accounting regulations, including American
Institute of Certified Public Accountants (AICPA) Statement of Position (SOP)
97-2, Software Revenue Recognition, and SOP 98-9, Modification of SOP 97-2,
Revenue from packaged product sales to and through distributors and resellers is
recorded when related products are shipped. Maintenance and subscription
revenue, if any, is recognized ratably over the contract period. When the
revenue recognition criteria required for distributor and reseller arrangements
are not met, revenue is recognized as payments are received. Provisions are
recorded for returns and bad debts. Our software arrangements do not contain
multiple elements, and we do not offer post contract support.

RESULTS OF OPERATIONS (IN $000)

THREE MONTHS ENDED DECEMBER 31, 2006 COMPARED TO THREE MONTHS ENDED DECEMBER 31,
2005

REVENUES

Total revenues were $58,948 and $17,834 for the three months ended December 31,
2006 and 2005, respectively; an increase of $41,114 (230.5%). The principal
reason for the increase is due an overall increase in revenue in our staffing
businesses.

STAFFING

Revenues from our staffing business units were $33,515 and $17,002 for the three
months ended December 31, 2006 and 2005, respectively; an increase of $16,513
(97.1%). The principal reason for the increase is due to an increase in revenue
from our staffing activities and our focus on this segment of our business - in
California and in medical staffing.

PEO SERVICES

PEO revenues were $25,237 and $387 for the three months ended December 31, 2006
and 2005, respectively; an increase of $24,850 (6,421%) due primarily to the
addition of new clients and associated worksite employees and the acquisition of
All Staffing in September 2006.

Under current GAAP rules, we are required to book PEO revenues on a net fee
basis rather than as gross billed payrolls.

                                      20



<PAGE>

PRODUCTS AND MANGEMENT FEES

Sales of products and software were generated from sales of imaging products in
Solvis (imaging unit) and from management fees charged to a related party.
Products and other revenues were $196 and $445 for the three months ended
December 31, 2006 and 2005, respectively; a decrease of $249 (56.0%). The
decrease is principally due to decreased management fees.

COST OF PRODUCTS SOLD

Costs of staffing for the three months ended December 31, 2006 and 2005 was
$29,103 (86.8% of temporary staffing revenue) and $14,477 (85.1% of temporary
staffing revenue), respectively. The increase in gross profit is due primarily
to lower workers' compensation costs and reduced FUTA and SUI cost during the
quarter ended December 31, 2006.

Cost of PEO services for the three months ended December 31, 2006 and 2005 was
$24,649 (97.7% of PEO revenues) and $299 (77.3% of PEO revenues), respectively.
The decrease in gross profit is due primarily to higher workers' compensation
costs.

Cost of products and software for the three months ended December 31, 2006 and
2005 was $9 (4.6% of product revenue) and $7 (1.6% of product revenue),
respectively.

OPERATING EXPENSES

Operating expenses for the three months ended December 31, 2006 and 2005 were
$4,213 and $2,537, respectively; an increase of $1,676 (66.1%). The increase is
due to expenditures associated with building our business infrastructure
(systems and staff) to accommodate our anticipated revenue growth.

OTHER INCOME AND EXPENSE

Interest expense and financing costs for the three months ended December 31,
2006 and 2005 was $1,822 and $140 respectively; an increase of $1,682 (1,201%).
The increase was principally due to the increase in debt associated with the
February 2006 refinancing, the amortization of debt discount and debt issue cost
associated with the February 2006 refinancing and a non-registration penalty.

GAIN ON EXTINGUISHMENT OF DEBT

During the three months ended December 31, 2006 and 2005, the Company recognized
a gain on settlement of debt of $257 and $4,262, respectively, which resulted
primarily from the write off of stale accounts payable and judgments for the
three months ended December 31, 2005 and the write off of certain notes payable
for the three months ended December 31, 2006. We based upon an opinion provided
by independent legal counsel, have been released as the obligator of these
liabilities. Accordingly, management has elected to adjust its accounts payable
and to classify such adjustments as settlement of debt.

CHANGES IN DERIVATIVES AND WARRANTY LIABILITIES

For the three months ended December 31, 2006, we recorded other income of $329
related to the change in the value of the debt features and warrants principally
a result of the decrease in our stock price.

SIX MONTHS ENDED DECEMBER 31, 2006 COMPARED TO SIX MONTHS ENDED DECEMBER 31,
2005

REVENUES

Total revenues were $95,906 and $29,863 for the six months ended December 31,
2006 and 2005, respectively; an increase of $66,043 (221.2%). The principal
reason for the increase is due an overall increase in revenue in our staffing
and PEO businesses.

STAFFING

Revenues from our staffing business units were $66,597 and $28,545 for the six
months ended December 31, 2006 and 2005, respectively; an increase of $38,052
(133.3%). The principal reason for the increase is due to an increase in revenue
from our staffing activities and our focus on this segment of our business - in
California and in medical staffing.

PEO SERVICES

PEO revenues were $8,230 and $682 for the six months ended December 31, 2006 and
2005, respectively; an increase of $27,548 (4,039%) due primarily to the
addition of new clients and associated worksite employees and the acquisition of
All Staffing in September 2006.

Under current GAAP rules, we are required to book PEO revenues on a net fee
basis rather than as gross billed payrolls.

                                      21



<PAGE>

PRODUCTS AND MANGEMENT FEES

Sales of products and software were generated from sales of imaging products in
Solvis (imaging unit) and from management fees charged to a related party.
Products and other revenues were $1,079 and $636 for the six months ended
December 31, 2006 and 2005, respectively; an increase of $443 (69.7%). The
increase is principally due to increased management fees.

COST OF PRODUCTS SOLD

Costs of staffing for the six months ended December 31, 2006 and 2005 was
$59,138 (88.8% of temporary staffing revenue) and $25,303 (88.6% of temporary
staffing revenue), respectively. The change in gross profit percentage is not
significant.

Cost of PEO services for the six months ended December 31, 2006 and 2005 was
$27,004 (95.7% of PEO revenues) and $653 (95.7% of PEO revenues), respectively.
The change in gross profit percentage is not significant.

Cost of products and software for the six months ended December 31, 2006 and
2005 was $20 (1.9% of product revenue) and $18 (2.8% of product revenue),
respectively. The increase in gross profit was due to the significant growth in
management fees.

OPERATING EXPENSES

Operating expenses for the six months ended December 31, 2006 and 2005 were
$8,085 and $4,208, respectively; an increase of $3,877 (92.1%). The increase is
due to expenditures associated with building our business infrastructure
(systems and staff) to accommodate our anticipated revenue growth.

OTHER INCOME AND EXPENSE

Interest expense and financing costs for the six months ended December 31, 2006
and 2005 was $3,089 and $564 respectively; an increase of 2,525 (447.7%). The
increase was principally due to the increase in debt associated with the
February 2006 refinancing, the amortization of debt discount and debt issue cost
associated with the February 2006 refinancing and a non-registration penalty.

GAIN ON EXTINGUISHMENT OF DEBT

During the six months ended December 31, 2006 and 2005, the Company recognized a
gain on settlement of debt of $608 and $5,603, respectively, which resulted
primarily from the write off of stale accounts payable and judgments and during
the six months ended December 31, 2006 included the settlement of certain notes
payable by issuing common stock. We based upon an opinion provided by
independent legal counsel, have been released as the obligator of these
liabilities. Accordingly, management has elected to adjust its accounts payable
and to classify such adjustments as settlement of debt.

CHANGES IN DERIVATIVES AND WARRANTY LIABILITIES

For the six months ended December 31, 2006, we recorded other expense of $1,608
and $982, related to the increase in value of the debt features and warrants. A
tabular reconciliation of this adjustment follows:

For the six months ended December 31, 2006:

         $ 1,608        expense, increase in value of warrant liability
         $   982        expense, increase in value of derivative liability
         -------
         $ 2,590        other expense related to convertible debt

For the six months ended December 31, 2006, the Company recorded $1,959 of
interest expense related to the accretion of debt related to the convertible
financing.

For the six months ended December 31, 2006:

         $ 1,959        of interest expense related to accretion of convertible
         ------           debt
         $ 1,959        of interest expense related to convertible debt

                                      22



<PAGE>

The balance of the carrying value of the convertible debt as of December 31,
2006 is:

         $ 1,605        original carrying value on convertible debt
         $  (228)       converted to equity
         $ 2,843        accretion of convertible debt
         ------
         $ 4,220        December 31, 2006 carrying value of debt

The balance of the carrying value of the derivative liability as of December 31,
2006 is:

         $ 2,717        original value of derivative liability
         $(1,234)       income, decrease in value of derivative liability
         -------
         $ 1,483        June 30, 2006 value of derivative liability
         $   982        expense, increase in value of derivative liability
         ------
         $ 2,465        December 31, 2006 value of derivative liability

The balance of the carrying value of the warrant liability as of December 31,
2006 is:

         $ 3,892        original carrying value of warrant liability
         $  (754)       income, decrease in value of warrant liability
         ------
         $ 3,138        June 30, 2006 value of warrant liability
         $ 1,608        expense, increase in value of warrant liability
         ------
         $ 4,746        December 31, 2006 value of warrant liability


LIQUIDITY AND CAPITAL RESOURCES

Historically, we have financed our operations primarily through cash generated
from operations, debt financing, and the sale of equity securities.
Additionally, in order to facilitate our growth and future liquidity, we have
made some strategic acquisitions.

As a result of some of our financing activities, there has been a significant
increase in the number of issued and outstanding shares. During the year ended
June 30, 2006 and the year ended June 30, 2005, we issued an additional
1,241,283 and 914,450 post split shares, respectively. These shares of common
stock were issued primarily for corporate expenses in lieu of cash, for
acquisition of businesses, for the conversion of convertible debentures and
other debt, and for the exercise of warrants.

As of December 31, 2006, we had negative working capital of $28,512, a decrease
in working capital of $3,596 since June 30, 2006.

The Company is late on filing payroll tax returns and owes approximately $8.7
million in payroll taxes.

Net cash provided by operating activities was $2,989 for the six months ended
December 31, 2006 as compared to net cash provided by activities of $2,515 for
the six months ended December 31, 2005; an increase of $474. The principal
reasons are the increase is due to us generating income from operation during
the six months ended December 31, 2006.

Cash used in financing activities was $4,010 for the six months ended December
31, 2006 as compared to $1,817 for the six months ended December 31, 2005, a
increase of $2,193 from the six months ended December 31, 2005. The primary
reason for the increase was due to the paydown of notes payable during the six
months ended December 31, 2006.

We have no material commitments for capital expenditures. Our 5% convertible
preferred stock (which ranks prior to our common stock), carries cumulative
dividends, when and as declared, at an annual rate of $50 per share. The
aggregate amount of such dividends in arrears at December 31, 2006, was
approximately $484.

Our capital requirements depend on numerous factors, including market acceptance
of our products and services, the resources we devote to marketing and selling
our products and services, and other factors. The report of our independent
auditors accompanying our June 30, 2006 financial statements includes an
explanatory paragraph indicating there is a substantial doubt about our ability
to continue as a going concern, due primarily to the deficit in our working
capital and net worth.

                                      23



<PAGE>

CONTINGENT LIABILITY

The Company accrues and discloses contingent liabilities in its consolidated
financial statements in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 5, Accounting for Contingencies. SFAS No. 5 requires
accrual of contingent liabilities that are considered probable to occur and that
can be reasonably estimated. For contingent liabilities that are considered
reasonably possible to occur, financial statement disclosure is required,
including the range of possible loss if it can be reasonably determined. The
Company has disclosed in its audited financial statements several issues that it
believes are reasonably possible to occur, although it cannot determine the
range of possible loss in all cases. As these issues develop, the Company will
continue to evaluate the probability of future loss and the potential range of
such losses. If such evaluation were to determine that a loss was probable and
the loss could be reasonably estimated, the Company would be required to accrue
its estimated loss, which would reduce net income in the period that such
determination was made. During the fiscal year ended June 30, 2006, the Company
recorded $530,000 in loss reserves, as opposed FY 2005 in which the Company
recorded approximately $463,000 in loss reserves.

OFF-BALANCE ARRANGEMENTS

There are no off balance sheet arrangements that have or are reasonably likely
to have a current or future effect on our financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that are material to investors, except
for the following.. As of September 8, 2004, Warning Management Services, Inc.
("Warning") purchased all of the issued and outstanding shares of Employment
Systems, Inc. ("ESI") for $1,500. The purchase was $750 cash paid at the closing
and a $750 note payable. In connection with this transaction, the Company agreed
to be a guarantor of the $750 note payable. Our CEO, Brian Bonar, is also the
CEO of Warning. As inducement to enter into this guarantee, we were given a
non-cancelable 2-year payroll processing contract with ESI. Currently the $750
note payable is in dispute. Warning is claiming that certain representations
made by ESI were not correct and is proposing that the purchase price be
reduced, thus reducing the $750 note payable to $258. Management has evaluated
this contingent liability and has determined that no loss is anticipated as a
result of this guarantee.

Warning Model Management, Inc. reached a settlement with Berryman & Henigar
Enterprises, during the six months ended December 31, 2006, to pay the aggregate
sum of $380, which has been paid in full. Accordingly, Dalrada's guarantee of
this indebtedness in no longer applicable.

ITEM 3. CONTROLS AND PROCEDURES

Our Chief Executive Officer and Chief Financial Officer have evaluated the
effectiveness of our disclosure controls and procedures (as such term is defined
in Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934, as amended
(the "Exchange Act")) as of the period ended December 31, 2006, covered by this
quarterly report (the "Evaluation Date"), and based on such evaluation, such
officers have concluded, as of the Evaluation Date, that our disclosure controls
and procedures were not effective in ensuring that all information required to
be disclosed in reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission rules and forms.

The material weaknesses in internal control over financial reporting resulting
from the Chief Executive Officer and Chief Financial Officer's evaluation are
described below. In addition there are inherent limitations to the effectiveness
of any system of disclosure controls and procedures. Even effective disclosure
controls and procedures can only provide reasonable assurance of achieving their
control objectives.

Except as described below, during our third quarter of fiscal 2006, there were
no changes made in our internal control over financial reporting that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting. Attached as Exhibits 31.1 and 31.2 to this
annual report are certifications of the Chief Executive Officer and Chief
Financial Officer required in accordance with Rule 13a-14(a) of the Exchange
Act. This portion of the Company's quarterly report includes the information
concerning the controls evaluation referred to in the certifications and should
be read in conjunction with the certifications for a more complete understanding
of the topics presented.

                                      24



<PAGE>

In conjunction with their audit of our fiscal year 2005 consolidated financial
statements, PMB & Co., LLP (PMB), our independent registered public accounting
firm, identified and orally reported to management and the Audit Committee the
material weaknesses under standards established by the Public Company Accounting
Oversight Board (PCAOB). A material weakness is a significant deficiency, or
combination of significant deficiencies, that results in more than a remote
likelihood that a material misstatement of the annual or interim financial
statements will not be prevented or detected. A significant deficiency is a
control deficiency, or combination of control deficiencies, that adversely
affects our ability to initiate, authorize, record, process, or report external
financial data reliably in accordance with generally accepted accounting
principles such that there is a more than a remote likelihood that a
misstatement of our annual or interim financial statements that is more than
inconsequential will not be prevented or detected.

The material weaknesses were identified as:

(1) Planning and implementation of our Accounting System; (2) Financial
Statement closing process; (3) Ineffective Information Technology control
environment, including the design of our information security and data
protection controls; (4) Untimely detection and assessment of impairment of
intangible assets (i.e., patents where indicators of impairment are present; (5)
Inadequate review of the valuation of certain payroll tax liabilities that
resulted in post-closing journal entries to properly reflect our payroll tax
liabilities; (6) Proper recording of conversion of debt into shares of common
stock, including the ability of certain managers to record journal entries
without adequate review or supporting documentation and an inability by
management to adequately review the issuance of common stock; and, (7) Lack of
the necessary depth of personnel with sufficient technical accounting experience
with U.S. GAAP to perform an adequate and effective secondary review of
technical accounting matters. We will continue to evaluate the material
weaknesses and will take all necessary action to correct the internal control
deficiencies identified. We will also further develop and enhance our internal
control policies, procedures, systems and staff to allow us to mitigate the risk
that material accounting errors might go undetected and be included in our
consolidated financial statements.

We contemplate undertaking a thorough review of our internal controls as part of
our preparation for compliance with the requirements under Section 404 of the
Sarbanes-Oxley Act of 2002 and we are using this review to further assist in
identifying and correcting control deficiencies. At this time, we have not
completed our review of the existing controls and their effectiveness. Unless
and until the material weaknesses described above, or any identified during this
review, are completely remedied, evaluated and tested, there can be no
assurances that we will be able to assert that our internal control over
financial reporting is effective, pursuant to the rules adopted by the SEC under
Section 404, when those rules take effect.

At present, we have taken steps to improve our internal controls through the
acquisition and implementation of new accounting systems and additional
personnel in our finance departments.

PART II - OTHER INFORMATION

(in thousands, except per share data)

ITEM 1. LEGAL PROCEEDINGS

The Company and its SourceOne Group ("SOG") subsidiary have been sued by the
Arena Football 2 Operating Company, LLC ("Arena") in Wayne County Circuit Court,
Michigan. In April 2006, Dalrada and SourceOne Group, Inc. entered into a
settlement with AF2 Operating Company, LLC and other parties involved in the
matter of AF2 Operating Company, LLC v. SourceOne Group Inc., et al. The net
result of the settlement was that Dalrada and SourceOne Group, Inc. are
obligated to make a net settlement payment of $203.

The Company and SOG have been sued by Liberty Mutual Insurance Company
("Liberty") in the United States District Court for the Northern District of
Illinois. The initial claim by Liberty was estimated by Liberty to be $829 and
is now claimed to exceed $1,000. In July 2006, the judge dismissed Dalrada from
the litigation and dismissed many, but not all, of the claims against SourceOne
Group. Management has vigorously contested the claims made by Liberty. Trial is
scheduled for January 2007.

                                      25



<PAGE>

On March 17, 2005, Greenland Corporation ("Plaintiff"), filed an amended
complaint in the Superior Court of California, County of San Diego, Case No.
GIC842605, against the Company and multiple other individuals and entities
resulting from a transaction as evidenced by the "Agreement to Acquire Shares"
dated August 9, 2002, whereby the Company obtained a controlling equity interest
in Plaintiff. Plaintiff contends that the Company engaged in various forms of
wrongdoing including breach of fiduciary duty, conversion, conspiracy and aiding
and abetting. The Company has filed a cross-complaint alleging various causes of
action against Plaintiff and its officers, directors and/or managing agents
including Thomas J. Beener, Gene Cross, George Godwin, and Edward Sano. The
subject cross-complaint seeks pecuniary and punitive damages resulting from
various fraudulent transactions as well as legal malpractice against Mr. Beener.
In July 2006, the matter was settled with Dalrada paying $150 of legal fees
incurred by Greenland.

On August 29, 2005, United Bank & Trust filed suit against the Company and other
parties. The allegations of the lawsuit are that the Company guaranteed certain
debt owed by InfoServices, Inc. and is liable in the amount of $678. The Company
has settled this matter and at December 31, 2006, the remaining amount due is
$236.

The Company was in a dispute with former creditors regarding the amount of debt
converted into common stock. These creditors were seeking damages totaling $316.
The Company proposed a settlement in the amount of $316, based on the advice of
the Company's legal counsel. Consequently, $316 was charged to operations in the
accompanying financial statements for the year ended June 30, 2006. The
plaintiffs have accepted the settlement offer.


ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

During the three months ended December 31, 2006, the Company issued 50,000
shares of common stock for the settlement of certain notes payable.


ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

ITEM 5. OTHER INFORMATION

None


ITEM 6. EXHIBITS

a) Exhibits

31.1    Rule 13a-14(a) Certification of CEO

31.2    Rule 13a-14(a) Certification of CFO

32.1    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
        to Section 906 of the Sarbanes-Oxley Act of 2002 of CEO

32.2    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
        to Section 906 of the Sarbanes-Oxley Act of 2002 of CFO



                                   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.

Dated: February 20, 2007

DALRADA FINANCIAL CORPORATION
(Registrant)



By: /S/ Brian Bonar
-------------------------------------
Brian Bonar
Chairman and Chief Executive Officer


By: /S/ David P. Lieberman
-------------------------------------
David P. Lieberman
Chief Financial Officer


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